The CPI comes out tomorrow but I will be on a plane so I am sending it now. It will clearly be the data point of the week if not the year so far. With the labor market still strong, the Fed appears uniquely focused on price level as the key issue affecting policy.

I have told you before, but I threw together a simple model for the CPI forecast. It isn't perfect as no forecasts are. What it does do is use the variables that my students over the last 4 years have found are the most important determinants of CPI. None of the groups has put all into one index, but all of these variables show up most consistently.

CRB Index - commodities prices are an obvious driver of inflation. Over the past month these are flat to a little lower as global investors are more worried about a global recession.

M2 money supply which just went negative for the first time in forever. This is clearly a negative impact on prices. What I do not include (as it is not consistent) but which one can't ignore now is fiscal stimulus as I wrote about in my post earlier today.

Financial conditions which I wrote about two days ago. These have flat-lined but I think the Fed still wants them tighter. The impact right now on CPI should be benign this month.

PPI Index - can companies pass along price? In the days of Amazon strength not so much. With supply chain disruption that changed. The effect this month should be minimal.

Inflation expectations - this gets to the stickiness of price levels. Over the past year inflation expectations have fallen. Over the last month, they have inched back higher.

In aggregate the measure forecasts a softer than expected CPI tomorrow. Over the last 20 years it has a 96% R^2. You can see lately that has fallen somewhat as it is noisier. Directionally I still would believe it.

The thing is, it appears that a softer than expected CPI is now consensus. You can see that in the short-covering this week. You can see it in only 9 of 66 economists forecasting over 0.3% mom.

So what do you do when you find yourself in consensus? You get to the sideline and wait for the news to come out. That is where I am.

Oh, and Stay Vigilant

#markets #investing #inflation