2022-06-27

Updated: Rallying Up the Wall of Worry: I Don't Expect 10pc CPI in June

Update: The Cleveland Fed saw this post and explained the 10 percent forecast is Q2 yoy change annualized, not a prediction of the headline figure:
Thanks for your interest in the Cleveland Fed’s inflation indicators. I wanted to suggest an edit to your June 27 post; specifically, to clarify how the 10 percent inflation projection should be described. The Cleveland Fed inflation nowcasting model expects a month-on-month reading in June of 0.98% for CPI, translating to a year-over-year reading of 8.67%. Estimates here. The 10% figure is for CPI inflation during the second quarter, at a quarterly annualized percent change—that is, the average CPI level during April-May-June, divided by the average CPI level during January-February-March, to the fourth power, minus 1, times 100. So this inflation rate is different from the statistics that are most commonly reported.
I was wrong about what the 10 percent number was, but was right that it made no sense. Their forecast for June CPI looks to be on target as well given the rise in crude oil. I discuss this more here. Original post: The Cleveland Fed does a Nowcast of inflation similar to the Atlanta Fed's GDP Now model. It takes incoming data and projects the CPI that the government will release. (Both are linked on the left sidebar.) The Cleveland Fed is projecting a CPI above 10 percent for June. Is this possible, even though inflation has almost certainly peaked? Here's crude oil:
Those boxes are one-month each, showing April, May and June. It's clear to see crude oil hasn't started reversing CPI yet. It is stabilizing, but unless it craters this week, it won't do much to slow inflation. Some else has to be spiking if the Cleveland Fed projects such a high CPI reading.

In early June I posted Vertical Home Price Move Ending. It discussed how the CPI measures housing and how that data lags:

If what I'm seeing online is correct, home prices won't peak until April. The Case-Shiller index might not peak until June or July. The final peak of the "real" CPI will be well into double-digits.
I am not surprised by the Cleveland Fed's forecast, but by the timing of it.

Also, timing is everything in the markets. The Federal Reserve meets on July 27. They will have almost a month of fresh data (they have access to raw economic data), while the June CPI will be in the past when it is report on July 13. The question I'm wrestling with is: when to go short again? Will the rally terminate on or around July 13 if the CPI comes in at 10 percent headline or will it keep rallying if the monthly change is low? What's driving headline? Will the Fed react to incoming data or to the headline news?

The simple answer is follow the charts. This is why charting can be useful: you ignore the noise. We have two viable scenarios. Let the chart tell us which will unfold.

We can also analyze the CPIAUCSL data set available at FRED. I plugged in the month-on-month change needed to reach 10 percent CPI in July.

When I look at all the charts I posted in Adios Inflation, I wonder how can the Cleveland Fed project a 2.3 percent increase in a single month when the commodities spike in March 2022 only produced a 1.2 percent monthly increase. My hunch is CPI is going to come in much lower than expected. "Way lower" if the 10 percent Nowcast spreads around. Inflationists will be caught out of position, providing fuel for the next (final?) leg up in stocks.

No comments:

Post a Comment