Friday, September 21, 2007

CPI Volatility

This chart shows the absolute value of the change in the seasonally adjusted CPI-U as a percentage from one month to the next. The red line is a 6th order polynomial and is an attempt to make sense of the trend. It just seemed to be the one that best matched the data's ups and downs (although I wouldn't read too much into it, the 1960 to 1962 time frame especially so).

The nice part about this chart is that speculators can't push the CPI-U around much (unlike oil and therefore gasoline one would think). What could a speculator do? Buy everything? Services included? That's a bit difficult to say the least.

So what can possibly be learned from this chart? I'd say that the Fed is having a harder time lately keeping the CPI-U exactly where they want it. An analogy might be that they were once riding around the pasture on a cow and now they are riding around the pasture on a bull.

Once again, rising volatility implies rising fear. I think it is safe to say that many of us are watching the inflation/deflation headlines more than we once were and have begun to do things that perhaps are not so easily predicted because of it. No matter how advanced the Fed's models are, it seems very unlikely that they expected my girlfriend to buy 25 cans of tomato soup this week (it cracks me up a bit so I apparently can't stop talking about it ;)).

See Also: Leverage Rising

Source Data: Consumer Price Indexes (CPI)

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