Wednesday, April 20, 2011

Motor Fuel and CPI - St. Louis Fed

Taken from the link above

The St. Louis Fed report indicates that for the past four years Motor Fuel has been the real volatile component in the CPI calculation despite its small weight. The CPI trend has a standard deviation (SD) only 2% when you exclude Motor Fuel vs. 5.4% and 6% SD's for headline and food exclusion respectively. 

A historian would laugh at this chosen time frame as such deviations will have no effects in the long run. Though since the FED is short run oriented this perhaps does have real implications for Fed policy, and CPI weightings and calculation as inflation becomes more relevant. 

Also as traders and investors, the short run is what we are interested in, or at least the majority of behavior would often reflect this if not thought. If motor fuel is indeed as important as this report may claim, perhaps focusing on its effects on consumption and growth may led to fruitful macro trades?

Either way, as we progress towards the end of the century weightings will indeed have to change significantly as energy prices will continue become more and more volatile. CPI will have to be rebalanced more frequently. This will all change of course when the next energy panacea is created by huge leap in energy technologies or a new viable source of energy discovery. 

Analyze Capital LLC

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