Revisited CPI data confirm our prediction - energy prices will not be growing faster than other goods and services in the next ten years

 Economic variables measured by economic agencies and institutions present a unique source of valuable information for a scientist with a background in physics. Instead of building thought experiments based on shaky assumptions, as economists usually do, physicists first look into the data and try to find regular behavior, which can be described by simple functions/equations. Such regular behavior allows predicting the future behavior of economic (and physical) variables, and this is what we do in hard sciences.  The evolution of the consumer price index (CPI) in the USA is one of such variables we study since the mid-2000s. In 2008, we published a paper on the presence of long-term sustainable trends in the differences between various components of the CPI in the USA.

We started with the difference between the core CPI (i.e. CPI less food and energy) and the overall CPI. In this post, we revise the previous observations and add data for the last 4 years (our previous post on this issue was published on December 25, 2016. First, we repeat two Figures (1 and 2) from the previous post, which are borrowed from the aforementioned paper:

Figure 1. Linear regression of the difference between the core CPI and CPI for the period from 1981 to 1999.  The goodness-of-fit is 0.96, and the slope is 0.67.

Figure 2. Linear regression of the difference between the core CPI and CPI after 2002.  The goodness-of-fit is 0.86, and the tangent is -1.57.  Elevated volatility has been observed since 2005.

In this twelve-year-old paper as well as in later papers on the sustainable trends in the CPI and PPI (see here), we suggested that the negative trend shown in Figure 2 should reach some bottom point and then turn to a positive trend. It was also mentioned that such processes in the past had been accompanied by an elevated volatility in the difference, i.e. high amplitude fluctuations.

Eight  years after the 2008 prediction, we confirmed and reported that the initial predictions were accurate - after reaching the bottom in 2010, the trend turned to a positive one and was likely approaching (in 2016)  the mid-point of the contemporary linear segment. It is important to stress, that from the very beginning, we have been reporting on the evolution of the difference between the headline CPI and core CPI (cCPI, i.e. CPI less food and energy) many times. The 4-year-long gap in reporting is due to lack of time  - analysis of the DPRK nuclear tests and their aftershocks were of the highest priority. At the same time, the 4-year-gap makes it possible to assess the accuracy of the previous predictions without short-term prejudice.

Our concept of cyclic evolution was formulated in 2007. Essentially, this concept says that the future trajectory has to repeat the path observed thirty years ago, i.e. the cycle has a 30 years period. Figure 3 (repeated from the previous post) presents the state of the CPI difference normalized to the headline CPI ( [cCPI-CPI]/CPI ) observed since the late 1950s (dotted red line) and the predicted trajectory (blue dotted line), which is the current curve shifted by 30 years ahead. Figure 4 (also from the previous post) presents corresponding linear trends with all volatile periods removed. The current period between 2010 and 2025-2030 is characterized by faster growth in the prices of all goods and services (cCPI) than the growth of food and energy prices included in the CPI.  

Figure 3. The difference between core (cCPI) and headline (CPI) CPI normalized to CPI. The period of the cycle is 30 years and the dotted blue line presents the future of the normalized difference before 2044.

Figure 4. The current state of our prediction. Redline follows up the blue line.

Twelve years after the first prediction we have to conclude that it was extraordinary by its accuracy - we predicted the era of low energy+food prices (core CPI is the headline CPI less food and energy) since 2014 (the end of the transition to the new positive trend)  and for the following ~20 years. For energy companies, Figure 4 implied that oil/energy prices are on a negative trend until at least 2030.

Figure 5 presents the current state of the cCPI and CPI difference, as reported by the Bureau of Labor Statistics. The positive trend formed between  2014 and 2016 is still observed and will likely continue in the 2020s. This observation indicates that there is no reason to expect that food and energy will gain some economic power to push their prices above the overall price of other goods and services. A  figure in the Appendix repeats the old versions of Figure 3 with new data added.

 

Figure 5. Same as in Figure 4 with data between 2016 and 2020. The positive trend formed between  2014 and 2016 is still observed and will\likely continue in the 2020s.

Appendix.

 

 

 

Labor force participation rate in the USA will fall to 59% by 2025-2030. Revision of the 2013 prediction

 Seven years we presented a description of secular fall in the labor force participation rate, LFPR, measured by the Bureau of Labor Statistics (see original prediction in Figure 1). The LFPR (the portion of people in the labor force) for the working-age population (16 years of age and over) has been on a long-term decline since 1995. We predicted the fall down to 59% by 2025. The series of events in 2020 dramatically affected the labor force market in the USA and show that the overall evolution of the LFPR to the predicted level is still accurate. Between 2014 and 2019, the LFPR was hovering around 63% and slightly deviated from the predicted trajectory. Such deviations are not stable, however, and also were observed in the past. The long-term LFPR behavior is close to a sin(t) function. This might be an expression of the oscillating natural process driving the LFPR evolution as described by Russian economist Kondratiev, who introduced long-period (50 to 60 years) waves in economic evolution – see Figure 2. Following Kondratiev, we interpolated the observed LFPR curve by a sinus function with a period of ~70 years. In Figure 3, we added ~50 LFPR readings published since 2016 and show the most recent portion of the curve in Figure 4.

New data fit the predicted curve and allow to make some predictions.  We see that the bottom of the model function is expected in 2030 and the rate is 58.5%. We also observe the development of a new short-term level in the LFPR is expected near 61.5 %. The drop in the LFPR is an irreversible and economic activity in the USA is near the lowermost level. This does not mean, however, that international financial domination of the USA will not feed the US stock market and budget with money. The drop in the LFPR just means that the US labor market is on the degradation trajectory - more and more people will lose jobs before 2030. Actual recovery is possible only after 2040. It is not excluded that the next 20 years is the era of the US (more likely international) financial institutions.

Figure 1. Original prediction of the LFPR evolution in the USA made in the earlier 2010s. The long-term behavior is close to a sin function. This is an expression of the oscillating natural process in the background  of LFPR evolution.

Figure 2. The Kondratiev wave

 

Figure 3. Same as in Figure 1 with 50+ new readings since 2016. The drop in 2020 moves the observation curve down to the predicted one with a weak rebound in the second half of 2020.

Figure 4. The actual LFPR curve (red) and that predicted by sin function since 2000. Development of a new level in the LFPR is expected near 61.5 %.

New labor data indicate that there is no sign of fast economic recovery any time soon

 

1. Good news - the number of unemployed seems to fall and ( with some deceleration ) may reach the pre-crisis level. The number of unemployed may drop when people get jobs or when they leave the labor force, however. 

2. Another good news - the number of employed increases (also with deceleration).  Here we have to retain in mind the permanently (linear) growing working-age population. It increases at a rate of ~2,280,000 per year (between 2010 and 2020). One has to subtract approximately 1,000,000 (population times employment rate)  from the current employment level in the below figure in order to compensate for the expected change in the number of employed. Therefore, the total  increase from 133,400,000 in April to 149,732,000 in November has to be 15.4M instead of 16.4M.

3. The labor force participation rate hovers around 61.5% since June. This is not good news. Considering the potential economic growth there is no prospective - the employed and unemployed population left the labor force and there is no sign of recovery to the pre-crisis level any time soon.

Plague in Vienna , now COVID-19

There is a plague memorial just in the center of Graben - the center of Vienna. It has to remind everyone about the losses 350 years ago. Judging by the behavior of Vienneses and visitors, it does not. The COVID-19 pandemic was considered with a laugh by the younger population and immobilizing fear by political authorities. The former practically ignored social distancing and the latter are still dead scared of any decision - they want to fly between droplets of heavy rain. It does not work, as expected (European politicians is a very specific type of psychic anomaly). The largest number of new COVID-19 cases per day (at the testing rate is about half of that in the USA, UK, and Russia) was ~9,500. When scaled to the US population (330/9 =6.67), this rate is 350,000 per day. This is much much higher than the pick value in the USA. 

Why Organization for Security and Cooperation in Europe is fading away

 The OSCE is an example opposite to the UNSC. It does not have a veto agreement and many punish minorities. According to the OSCE, the US (the OSCE State Signatory)  elections do not show any problem as such. Frauds and massive manipulation do not affect the OSCE approach to other countries. 

The uneven approach makes the essence of the OSCE void and the organization deserves to be dismissed. I am sure nobody will remember it in a few days after it disappears. Even the current staff memebers. 

Macron said that the UN Security Council “is not making any useful decisions at the moment”.

 This statement is the best confirmation that the UN Security Council still\ is the best remedy from one-sided solutions leading to a big war. Macron wants "useful decisions" how he understands the usefulness for France and the EU. It is fully understandable that the President of a country must care about their own needs and problems. At the same time, if one country finds UNSC decisions as useful there are many others who might suffer. The creation of the SC was aimed at the impossibility of one-sided decisions. And it still works. The reason for such a strict rule is obvious - nobody has it right. The change is domestic and foreign policy among the UN countries has many dramatic moments since the SC creation. No country can claim that all problems are resolved now and forever (e.g. the 2020 US elections is a good example revealing structural faults in the US social/economic/racial/gender system). To retain this world as safe as possible the UNSC is needed now much more when during the cold war. The UNSC makes the most useful decision right now - it does not give any chance to fall in WWIII. I am sure that when Macron or any other top leader says that the UNSC is making useful decisions we will have thousands of missiles with nuclear warheads flying to make such decisions less useful for the speaker. 

European cities are not safe any more

 I reside in Vienna for the last 20 years with some gaps. The scene of the last attack in November is just at a gunshot distance from my place. I am scared and news from other European countries just makes my feelings suffer more. European cities are not safe because of the authorities' mistakes and crimes. We need a  safer environment to live and work.