TIPS and puzzles of the CPI

The Treasury Inflation-Protected Securities, TIPS, are inherently related to the Consumer Price Index. When using TIPS, one should understand the evolution of the CPI as related to the overall economic growth.  We have already reported on the deviation between the headline CPI and the price index for Gross Domestic Product, dGDP. There should be some reason behind the overall deviation since 1978 shown   Figure 1. One can see that the CPI is approximately equal to the GDP deflator multiplied by a factor of 1.2 since 1978. The CPI (black line) and 1.2dGDP (dashed violet) lines practically coincide.

It is also interesting that the difference between the CPI and 1.2dGDP, as shown in Figure 2, has a clear oscillating character of unknown origin.  It might be an artificial feature. In 2012, the difference should rise above 0 and thus the CPI will grow at a rate slightly larger than 1.2dGDP. 

One can easily play with the well predicted difference between the CPI and dGDP, which defines the rate of real GDP growth.

Figure 1.  Cumulative rates of CPI and dGDP inflation, original and scaled by a factor of 1.2.

Figure 2. The difference between the CPI and 1.2dGDP shown in Figure 1.