Do we foresee deflation?

We have been routinely reporting on the difference between the headline and core CPI since 2008. Figure 1 illustrates our general finding that this deference can be well approximated be a set of linear trends. The last trend likely finished in 2009. That’s why we expected a new trend to evolve since 2010 into the late 2010s.

The U.S. Bureau of Labor Statistics has reported the estimates of various consumer price indices for February 2012. Figure 2 shows the predicted trend and the actual difference since 2010. The difference has been fluctuating around zero since June 2011 and thus deviating from the predicted trend.  Essentially, the zero difference suggests that the core and headline CPI are practically equal and evolve at the same monthly rate, i.e. the joint price index of energy and food has been following the price index of all other good and services (the core CPI) one-to-one.
In our previous post we have shown that the price index of energy approaches the deflation watershed because of oil price reaching the level of the previous year in a month or two. Therefore, we expect the headline CPI to decelerate a bit together with energy, likely down to zero. If the core CPI will retain its current cohesion with the headline CPI, we will have a period of very low inflation in all good and services less energy and food. 
Figure 1. Two trends in the difference between the healine and core CPI.
Figure 2. The evolution of the difference between the core and headline CPI since 2002.

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