Food price: US and worldwide

In 2007, we predicted the linear trend in the difference between core CPI and the price index of food. Is it correct?

In June 2009, we revisited our early prediction of the linear trend in the difference between the core CPI and the consumer price index of food. Originally, in 2007, we predicted the evolution of several consumer price indices relative to core CPI in the USA [1]. Therefore, we have now more than 30 months to compare the prediction and actual estimates. The years of 2008 and 2009 were characterized by high volatility in the behaviour of all expenditure subcategories: energy, food, housing, etc. We are going to revise our prediction. In [1] we wrote:

“Figure 7 displays the difference between the core CPI and the index for food for the period after 1960. This curve differs from that in Figure 5. The first large change in the difference occurred in 1973 (not in 1979 as for energy) and lasted only 7 years. Around 1980, the difference started to grow from -7.0 to 13.0 in 1996. Between 1996 and 2003, the difference was effectively constant at the level of ~13.5 units of price index, i.e. a lengthy flat segment was observed. After 2003, the difference has been decreasing at a rate of 1.2 units per year, as Figure 8 demonstrates.


Overall, the difference between the core CPI and the food index was always lower than that between the energy index and the core CPI. The largest difference was only around 14 units. Since 2003, the food price index has been slowly catching up the core CPI. Extrapolating the current linear trend one can estimate the intercept point when the food price index will reach the core CPI. According to Figure 8, this will happen in 2014. Such behaviour differs from that observed for the energy index in terms of timing and amplitude, but the overall behaviour distinguishing periods of linear growth and bifurcation is very similar. Therefore, principal mechanisms behind the evolution of the food price index are similar to those behind the energy index. They are likely not related to the changes in supply pressure induced by good crops and draughts. These mechanisms have to be a part of economic system itself and should be related to relationships between economic agent not to production of goods and services.

Figure 7. The difference between the core CPI and the index for food between 1960 and 2007. There are three periods of linear trend and two turning periods. The most recent period of linear trend started in 2003.

Figure 8. The difference between the core CPI and the food index between 2002 and 2007. The current period of linear trend will be likely finished in 2014. Since 2003, the food price index has been slowly catching up the core CPI. “

In 2008 and 2009, the index of food grew at a higher rate compared to that predicted by the long-term-trend in Figure 8 in the excerpt. Figure 1 displays the difference between the (seasonally adjusted) core CPI and the index for food (beverages not included) we reported in June 2010. We suggested that the remarkable rally in food prices was forced the index for food to grow faster than predicted and the deviation from the trend predicted in 2007 reached ~7 units in 2008. This behaviour was likely related to the outstanding rally in oil price finished in July 2008. Correspondingly, almost all prices were driven up. After July 2008, the same prices have been declining at a higher rate sharing the faith of crude oil price. Accordingly, from January 2009, the index for food started to decline in absolute terms at its returning path to the old trend shown by pink line in Figure 1. The contemporaneous trend, as shown by black line, was far enough from the old one, but the difference was approaching the pink line.

Originally, the predicted difference (pink line) intersected the zero line around 2014. In June 2010, the (black line) trend crossed the zero line in 2010. Among many other conclusions made in June, there was the following one:

• The new trend for the index for food will start emerging somewhere between 2011 and 2014. Since the turn to the new trend, the index for food will start to lose its ground relative to goods and services comprising the core CPI. In other word, food will become cheaper in relative terms."


Figure 2 demonstrates that the difference between the core CPI and the index of food has returned to its current trend, however, at a somewhat lower level. The intercept with the zero line and likely the pivot to the decreasing food price now seems to start in 2012-2013. We will keep reporting on the difference which is crucially important for the population with low income. The UN reports the probability of world-wide food crisis as related to the all-time peak in food price.

Figure 1. Comparison of the trend predicted in 2007 and that in 2009. Current change in the index for food shifts the new trend towards the old one.

Figure 2. Same as in Figure 1 with new data for 2010.

References
1. Kitov, I., Kitov, O., (2008). Long-Term Linear Trends In Consumer Price Indices, Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 3(2(4)_Summ), pp. 101-112.