Latest Forecasts Optimistic On Upcoming CPI Inflation Reports

It’s possible to derive reasonable inflation forecasts ahead of the official release dates. The Cleveland Fed does this and the data for upcoming CPI reports appears like it may be good for markets.

Nowcasting Inflation

Nowcasting involves taking data that’s already available to predict upcoming economic economic releases. This paper explains how they do it. For example, energy costs are big driver of inflation currently, and energy is publicly traded with the price visible to all on a minute-by-minute basis. That, and other public data, makes it possible to form a reasonable estimate of where inflation might land in the official CPI report before it arrives.

Where Will Inflation Land For August and September?

The Nowcast currently suggests that U.S. inflation may come in at 0.06% month-on-month so essentially flat for August 2022, when the data is reported on September 13. That would be largely good news.

Then the same model sees September inflation, which will be reported in October, at 0.36% month-on-month. If that holds it would be much better than most recent months of inflation data, though an increase from the low levels of July and potentially August. Of course, these numbers change daily as more data come in and the Cleveland Fed updates their models.

Unfortunately, though this month-on-month numbers would be an improvement, we saw relatively tame inflation in the late summer of 2021 and inflation didn’t really spike until October 2021 and beyond.

This means that the headline U.S. inflation rate would likely remain at around 8% year-on-year despite month-on-month inflation easing sequentially. If inflation remains low into fall and winter, then the year-on-year inflation number would start to come down as some bigger month-on-month inflation numbers from late 2021 drop out of the 12 month inflation series.

Will This Be Enough For The Fed?

The Fed has signaled commitment to a rate hike later this month. Most likely a 75bps move up in interest rates at the Fed’s September meeting, with a smaller chance of a 50bps move, based on what interest rate futures imply.

The challenge for the Fed is that though these forecasts, if they hold, suggest calmer inflation, they are mainly based on swings in energy prices, which are somewhat temporary. Even if headline inflation comes down, the Fed will have its eye on underlying price trends for other goods and services that might be more predictive of where core inflation is trending. The Fed is not so much worried about energy pricing per se, but is very concerned that core inflation remains stubbornly above 2%. That’s hard to gauge and the Fed wants to be cautious in their assessment.

So we are likely set for some rosy inflation reports as price increases reduce compared to prior months. However, it remains to be seen whether that’s sufficient to calm the Fed’s desire to raise interest rates when inflation still remains well above their 2% goal.