Inflation Direction

Will an inflation narrative soon have an impact on the direction of stocks?

Current Forecasted Inflation Trends

The historical drop in crude starting in March had an immediate impact on the Government’s forecasts for headline Consumer Price Inflation (CPI) and the Personal Consumption Expenditures (PCE) inflation. However, in the recent past, the monthly CPI and PCE minus food and energy have shown little signs of deflation and changed little on a day to day basis.

Yes, the all-important annual inflation numbers have come down however the critical Core PCE Inflation (used by the Fed to target inflation) forecasts are still well above zero. This means there is little chance that if the trends for both Core CPI and Core PCE continue to stay stable for the rest of the month then any narrative involving inflation and stocks should remain positive. The next date we could see a material impact on Core PCE is May 29 when the BEA releases the April Personal Income & Outlays report. The next CPI release is May 12. See the full list of release dates below.

Forecasting Inflation – A Summary

The Cleveland Federal Reserve Bank estimates future inflation using a “nowcasting” model to calculate headline (including food and energy) and core consumer inflation (CPI) in addition to the Central Reserve Bank’s favorite gauge for inflation, headline and core personal consumption expenditures (PCE). The attached paper below details the approach.

The model outperforms an assortment of benchmarks including Blue Chip consensus and the Survey of Professional Forecasters (SPF). The model’s nowcasting exactness is commonly equivalent to that of the Federal Reserve’s Greenbook.

The forecasts show few changes in forecast accuracy across time with changes occurring when new or revised CPI and PCE data are released. Nowcasting accuracy improves with each additional CPI or PCE release.

Core CPI

The Core CPI model uses a smaller number of variables so changes occur less frequently. Since nowcasts depend on historical data, changes coincide with CPI releases.

Core PCE

The Core PCE model relies on past Core PCE and Core CPI data. Notable improvement occurs with the first monthly PCE reading in the quarter.

Testing Accuracy

Below, the Blue Chip marks show 2013Q2 nowcasts of headline inflation from the Blue Chip Economic Indicators surveys that were released in April, May, June, and July of 2013. The SPF median is from the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters for 2013Q2. The red line shows daily nowcasts of headline CPI inflation from the model. The solid black circle is the actual annualized CPI inflation rate in 2013Q2.

Seasonally Adjusted Annualized Rates (SAAR) –

Real-Time Nowcasts of Headline CPI Inflation in 2013Q2

Nowcasting

CPI/PCE/GDP Scheduled Updates

Releases

Paper

Nowcasting U.S. Headline and Core Inflation

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