Thursday, 27 October 2016

CPI has informative correlation with energy prices.

The CPI index for all items, year over year, has a remarkable correlation with energy prices over the past 16 months.

So much so, that one can take the year over year energy price changes as given by the Bureau of Labor Statistics (BLS) in their inflation reports and track the All Items inflation rate to within about +/- 0.3%.

In the following chart, I have used the energy price changes, scaled them by a weighting and overlaid it on the CPI all items index graph. EC on the charts stands for Energy (price) Contribution. Energy typically contributes about 7% of the CPI with slight month to month variations in the BLS data. Here is the basic comparison between CPI and energy price changes (Energy sector, gasoline and the WTIC oil contract):

In the second chart the energy price changes have been scaled by the weighting that energy has in the CPI calculation.
Blue line is CPI All Items index year over year for each month reported.
Red, green and purple lines are calculated from changes in energy prices using three slightly different weighting models:

I believe that this shows that inflation is critically dependent on energy price changes as the energy bear market might be starting to flatten out and turn up. This has big implications for interest rate policy and gold prices going forward.

I have prepared a more comprehensive report showing the methodology and covering a wider time frame. It uses my own proprietary model to attempts to forecast the Feb 2017 and Mar 2017 inflation figures that will be published by the US government on 15 March and 14 April respectively. I am currently refining this model in an attempt to forecast inflation directly from commodity price changes, particularly crude oil which is traded on a daily basis and appears to have predictive value. 

Once the Feb inflation figures are announced, further refining of the model will be possible and I intend to publish a second report later in march modelling the prospects for price inflation until then end of 2017.

I have posted a rehearsal of a presentation on this subject on YouTube at: (please forgive the shaky hand held camera!)

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