Crude Oil and Motor Fuel: Fair Price Revisited
In April 2009, we introduced a model representing the evolution of motor fuel price (a subcategory of the consumer price index of transportation) relative to the overall CPI as a linear function of time. Under our framework, all price deviations from the linear trend are transient and the price must promptly return to the trend. Specifically, the model predicted that “the price for motor fuel in the US will also grow by 50% by the end of 2009. Oil price is expected to rise by ~50% as well, from its current value of ~$50 per barrel.” The behavior of actual price has shown that this prediction is accurate in both amplitude and trajectory shape. Hence, one can conclude that the concept of price decomposition into a short-term (oscillating) and long-term (linear trend) components is valid. According to the model, the price of motor fuel and crude oil will be falling to the level of $30 per barrel during the next 5 to 8 years.
Long-Term Linear Trends in Consumer Price Indices
Headline CPI, core CPI and indices for various expenditure categories were analyzed. Long-term linear trends have been found in the difference between the core CPI and the headline CPI in the USA. Duration of these periods is different for positive (18 years) and negative (8 years) trends, and the trends change to opposite during some shorter time intervals of 2 to 4 years. The difference between the core CPI and the index for energy is similar to that between the core CPI and headline CPI. The index for energy will reach the core CPI in 2008, however. Then, one should not expect further increase in energy price beyond that dictated by the CPI. It is likely that oil price will be falling in absolute terms. The difference between the core CPI and the index for food also has two linear branches after 1980, but the slope of the current trend is weak and the difference will intercept zero line only in 2014. The difference between the core CPI and the housing index is characterized by an almost constant duration of negative and positive branches i?½ approximately 11 years. The current period of negative slope in the difference will approach its turning point in 2008 or 2009 and is characterized by very high volatility. The next trend has to be positive, i.e. the housing index will be growing at a lower rate than the headlining CPI. The difference for the transportation index had a longer period of positive slope i?½ between 1980 and 2004. During this period the difference reached the level of 30 units of index. Currently, a turning period is observed and a negative slope is developing. The difference related to price indices allows to accurately predicting the evolution of relevant stock market indices.
Weighted Median Inflation: Is This Core Inflation?
This paper investigates core inflation defined as the best predictor of inflation. I compare forecasts obtained using the mean, weighted median, trimmed mean, and less food and energy inflation rates for the consumer price index and the personal consumption expenditure deflator for the current U.S. monetary policy regime. Another issue addressed is that of the systematic bias that exists due to the differences in means of these measures. I test whether correcting for this bias can lead to better inflation forecasts. This paper finds that adjusting for bias improves forecasting and that the weighted median is a better forecaster than the alternative measures and thus is a good measure of core inflation.