Economic Research

Defiance Capital Management

Economic and Investment Research & Analysis

USA Consumer Inflation - Model update

June 17th, 2010 - 3 pages

Leonardo Cardoso Senior Analyst

leocardoso@defiancecap.com
www.defiancecap.com
 U.S. Prices, Productivity and Wages Indicators

June 17, 2010 Economic Research

Definition: The Prices, Productivity and Wages Indicators model includes the following
economic indicators: Consumer Price Index (CPI), Producer Price Index (PPI), GDP Deflator,
Productivity and Cost and the US Treasuries Nominal and Real Curve

This update in the model is to establish a base to forecast annualized monthly changes in the CPI and PPI indices. Until further notice, we
will be using an autoregressive analysis with two lags AR (2) model for both indices.

After analyzing monthly historical data since 1947 (759 observations), we concluded that for the Headline-CPI series a smaller data sample
from Jan-99 to Apr-10 is statistically appropriate, while for the Core-CPI series a slightly larger sample from Jan-91 to Apr-10 is statistically
appropriate. The regression coefficients (individually and together) are statistically significant and regression assumptions are not violated.
One of the most common problems on an AR model is autocorrelation of independent variables, but with a DW tests of 1.9932 and 2.0515,
our models are statistically free from the problem. Finally, a R2 of 0.2107 and 0.0896 indicate that ~21.0% and 8.9% of the change in the
predicted inflation is explained by their respective lagged variables.
P re d ic te d valu e

CPI - AR(2) model 10.0% 5.0% Core CPI - AR(2) model

4.0%
P r e d i c t e d v a lu e

5.0%
3.0%

0.0% 2.0%
-25.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 1.0%
-5.0% Lag 1 & 2
0.0%
Lag 1 & 2
-4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%
-10.0%
Lag1 Lag2 Linear (Lag1) Linear (Lag2)
Lag 1 Lag 2 Linear (Lag 1) Linear (Lag 2)

Based on our statistical models, our medium to longer-term inflation expectations is 2.6%. We expect US consumer inflation to resume
an uptrend, albeit a very mild one.

0.8% 10.0%
CPI Mo% Core-CPI Mo% Anlzd Mo CPI Anlzd Mo Core CPI
8.0%
0.6%
6.0%
0.4% 4.0%

0.2% 2.0%
0.0%
0.0% Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10
-2.0%
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10
-0.2% -4.0%

Source: Bureau of Labor Statistics

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and Investment Research & Analysis
 June 17, 2010 Economic Research

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