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 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. The evolution of the consumer price index (CPI) in the USA is one of such variables we have studied since the mid-2000's. 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 four 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. This presents the 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. This presents the 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 into 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.

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