My forecast for September CPI was 0.4%… another bullseye!
I have now been formally forecasting CPI prints for 5 months, and starting to establish a track record. Here is how I (blue line) have performed against the Bloomberg consensus benchmark (red line) over this period. The black line is where CPI data actually came in each month:
This performance highlights how monthly CPI data is notoriously hard to predict due to the sheer amount of noise/luck involved. I would argue that there is a lesser degree of noise/luck involved with long-term forecasts; those take skill & economic intuition. In that domain I remain steadfast in my long-term thesis that America is entering a new regime of structurally higher inflation, not just a simple transitory phase. Janet Yellen *still* disagrees with me me, as she reiterated just a few days ago that inflation is transitory. At least, she pretends to disagree with me in public. My theory is that she privately knows this isn’t true, but is shilling for #TeamTransitory nonetheless because pushing the “transitory” narrative provides cover for her administration to keep printing trillions of USD. She doesn’t want to spook the markets and pop the bubble she has created. She has no choice but to keep inflating it, and hope for the best. Her hands are tied.
She may even be right, ultimately, and inflation could still turn out to be transitory. After all, Cathie Woods says deflation is the risk we should be worrying about, and Tyler Cowen just wrote a Bloomberg article arguing that inflation will be transitory. It was a strong enough article in support of #TeamTransitory… until the very last paragraph, which rose my eyebrow:
The strongest case against #TeamPermanent relies on… expeditiously filling the empty seats on the Fed Board of Governors? I do not buy it. Permanent inflation is already happening, and it is being driven by macroeconomics/fundamentals… not by bureaucratic appointments (or lack thereof). The media loves to do this, take a serious issue and reframe it in the dumbest strawman dipshit argument, so that they can push their true agenda (which in this case seems to be filling those empty seats ASAP?). I notice Bloomberg in particular is guilty of this often — all their articles seem to be working hidden angles, they always seem to go out of their way to push a preferred narrative. Look no further than another embarrassing Bloomberg headline this week, “Transitory Inflation? The Fed Should Strive to Make It Permanent,” which argues that “the benefits of moderately rising prices and wages outweigh the costs.” This “inflation is good, actually” line is the same narrative found in this NYT article and this NYT article, and in this Stephanie Kelton article from last week called the Brighter Side of High Inflation. Right on cue, Joe Lockhart also says that Inflation is a good thing, and Jen Psaki described it as “a good thing.” You think it couldn't get any worse… until MSNBC tweeted this, before quickly deleting it after realizing how badly they pissed off twitter.
It is sad to watch these midwit journalists twisting themselves into pretzels trying to justify high inflation. This narrative is everywhere, one can’t help but wonder if it is coordinated. Here is the Senator from Rhode Island’s take, who wants you to think inflation means the economy is “fabulously strong and surging”:
Jason Furman @jasonfurman
I have yet to find a blemish in this jobs report. I've never before seen such a wonderful set of economic data: --Job gains in most sectors --Big decline in unemployment rate, even bigger for Black & Hispanic/Latino --Redn in long-term unemp --Solid (nominal) wage gainsAnd here is Buttigieg assuring you that inflation is a happy byproduct of his administration having “successfully guided this economy out of the teeth of a terrifying recession”:
It seems Klain’s minions are unironically going with the "inflation is a good thing" narrative. How predictable; blaming prosperity for causing inflation is meat and potatoes propaganda stuff. Goebbels would be proud.
It is no coincidence that the corporate elite who own these outlets are the same ones who own the corpse of Joe Biden (hmmm.. a merger of state and corporate power… isn’t there a name for that?), whose approval numbers sit at historic lows :
But wait — I was told, several months ago, that this downward trend in polling was was just a temporary blip due to bungling Afghanistan? Why the sustained drop? It seems pretty obvious that people are starting to wake up to Democrat lies, pitchforks and knives are being sharpened, and everyone expects the Democrats will be trounced in the 2022 midterms a-la Youngkin in Virginia. I can even quantify these expectations, as PredictIt is currently pricing in a 70% chance that the Democrats will lose the Senate in 2022, and an 80% chance that the Democrats will lose the House in 2022:
Maybe the tide is finally turning against the feckless Biden Administration, maybe their flaws are so blatant that they are impossible to ignore. Here are a few more gaffes (from October 2021 alone!) of them being snooty, out-of-touch, elites:
Biden's chief of staff says that inflation & supply chain are "high class problems"
Psaki treadmill gaffe in which she laughed off supply chain concerns, reducing them to the “tragedy of the treadmill that's delayed”
Using the same dismissive logic, Liz Reynolds seemingly brushed off concerns with a similar analogy “You won’t be able to get the jacket in 15 colors, but you will be able to get the jacket.”
Most skin-crawling of all was Energy Secretary Jennifer Granholm, who thinks it is not reasonable to ask a presidential administration to have a plan to lower gas prices. She thinks it is a joke. Seriously, just watch this reaction of the Secretary of Energy to the problem of high gas price:
Their next twisted talking point is that we can somehow address inflation by investing in infrastructure. Buttigieg went on MSNB 2 days ago and said that Biden’s proposed trillions in new spending will reverse the inflation crisis, and Yellen, AOC, Val Deming and countless others backed him up:
Increased spending… is now… the cure to inflation…? What? How are they getting away with pushing this talking point? How is nobody in the mainstream press calling them on their lies?
Not one single journalist will ask Janet Yellen to elaborate on the mechanisms through which spending on “infrastructure” will cure inflation. Seriously, please ask her to elaborate. She has no clue. That is because there is no empirical basis whatsoever for the claim that spending money on “infrastructure” will reduce inflation — it is totally made up out of thin air. This administration is ignoring data driven and sound economic policy in favor of indiscriminately waving inflation around as a cudgel to serve whatever political ends they please. In AOC’s case, last week, it was to attack those standing in the way of massive spending bills. Yesterday there was then a fun new expanded purpose! To push vaccine mandates.
This lady is saying if we all get injected with the Covid vaccine, it will solve the supply chain and inflation crisis. This is a joke right? That vaccine mandates heal supply chains? I would argue they do the exact opposite, and so would the American Trucking Association who warn that the industry could lose as much as 37 percent of its workforce due to vaccine mandates. Vaccine mandates intentionally disrupt our economic system, reduce workforce participation, and increase frictions in the labor market. The elites know this, they just don’t care. As Scott Greer put it, “this has to be the first admin to have complete contempt for the problems of ordinary Americans. They mock the supply shortage, pretend inflation is great, and laugh about high gas prices.”
“Vaccines cure inflation” is now also being championed by none other than friend-of-the-substack Kristalina Georgieva, the most powerful woman in the world who oversees the IMF’s trillion dollar lending capacity. It is a global, coordinated push. She says vaccines cure inflation.
Shelter as the Primary Long Term Driver
I bring up this same point (shelter) every month, because it is so obviously going to be the biggest driver of inflation over the next couple years, and not enough people are paying attention to it. Rising shelter costs are not built into enough models, few stakeholders are internalizing them, and as a result many models out there are wrong — or at best, miscalibrated.
It just boggles my mind how the Fed can say that inflation is going to be “transitory” when at the same time they know that shelter makes up ~32% of the CPI basket, and that their own internal research is expecting a “massive run-up in home prices” which will cause the shelter component of inflation to reach a 7-8% year-over-year increase by the end of 2023.
How is there not a single journalist that will ask Yellen how she can say there won’t be high inflation for the next 3 years, while her own models say otherwise? Why does she disagree with her models? It is a question worth asking. I don’t think she would be able to muster a coherent response.
Of course these rents are being driven by the housing price bubble, which in turn is being inflated by the Fed’s record loose monetary policy. The Fed continues to justify their ultra-easy monetary policy under the guise of "helping the poor," but it is doing the exact opposite. Rising rent hits the poorest the hardest as they have fewer assets and spend a higher fraction on their rent. As the nationwide eviction moratorium gradually ends, I am curious to see how that will play out. My guess is that it will exacerbate already frothy rent prices… as per Google Trends, “rent increase” is already at an all-time high:
Tapering
The big monetary news in October was the announcement of tapering. There has been soo much ink spilled over this subject lately that I am not going to rehash the same old arguments. Everything you need to know can be neatly summed up in 2 charts; Goldman Sach’s tapering projections, followed by their rate hike projections:
These projections have some wiggle room in them, and could be sped up or slowed down depending on prevailing economic conditions. But it would be foolish to think that the tapering and subsequent rate hikes will, generally speaking, look materially different than this — the Fed has choreographed everything pretty well in advance.
Not that it matters. This tapering is too little, too late, to make a dent in inflation, but I guess it is nice to see that they are at least going through the motions.
Energy / Gas
This chart speaks for itself. Gas prices have doubled over the past 18 months:
I disagree with the premise that “The President doesn’t control gas prices" — the US was energy independent a year ago — what changed? Perhaps waging war on the oil industry was a bad idea. But don’t worry! If you hate gas prices now, just wait until you see your heating bills this winter, as US households are expected to get hit by a 30% increase in heating bills. I would say this 30% figure is a conservative/lowball estimate too, given that natural gas prices have more than doubled in the past 6 months, and fully half of U.S. households heat their homes with natural gas.
Supply Chains
I hate to rely on Google Trends to make my points, but this history for the term “supply chain” really shows how hot the topic is:
It is such a complex topic that I don’t feel I can do it justice in one paragraph, but it is worth mentioning still because it is arguably the single biggest driver of inflation in the short-term. For a deep dive, I would recommend Sahil Bloom’s Substack article aptly titled Supply Chain Apocalypse.
But at the same time… it is really not that complicated, this issue can be mostly summed up in one chart. Here is the most recent shipping rates data:
Food & Fertilizer
Food gets boring to talk about every month because any normal person who buys groceries knows that prices are up way more than 4% this year. Just three days ago, the UN reported that global food prices are at a 10 year high, and every month a new round of companies warns us about rising prices. This month the heavy hitters were were Mondelez, Yara, and Nestle.
I think the big untold story here isn’t food (which has been covered by the mainstream press ad nauseum), but fertilizer. Fertilizer prices are a brand new development, happening just this month, and the mainstream press seems not to have noticed yet. This is important because fertilizer comprises ~20% of the input cost of agricultural products, and is the number one cost input for corn and rice. This extra cost is going to ruin a lot of families; enjoy your food inflation over the next couple years to complement your housing and energy inflation.
Consumer and Market Expectations
I have long maintained that there was mispricing in the bond market, and it is nice to be proven at least partially right. Breakeven inflation over 5 years is up 40 bps in the last month, as it finally looks like the market is starting to doubt the “transitory” narrative:
Which mirrors corporate concerns:
And consumer expectations:
As long as we are talking about inflation expectations, this new explosive criticism by Jeremy Rudd is worth noting because it was one of the spiciest inflation papers in years. It set the academic inflation world aflutter this fall, so much so that the WSJ wrote a nice feature on it called “Is Fed’s Inflation View Built on Sand? A Staffer Suggests So, Stirring Debate About Economics.” Check out footnote 2 in the paper, it is totally unheard of for a PhD economist at the Federal Reserve to go “off the leash” like this:
There is plenty of this similar woke innuendo sprinkled throughout the paper, but I at least respect him for being brave and different at an institution notorious for cutting down tall poppies. I think he makes a relatively strong point that expectations play a second order role while real variables have first order importance. At the very least it is an interesting paper to take note of, a very interesting discussion on inflation dynamics! A must read paper!
Used Cars
Used cars had a historic October, increasing by 9.2% in one single month:
Which increasingly proves my plateau prediction from 6 months ago correct:
Used cars are just another example of how inflation is regressive tax. Poorer households are especially likely to feel the burden, yet clueless/selfish libs are willing to brush that aside to talk up their own book. This Pearkes guy doesn’t care if a single, working-class mother can afford a car or gas. Inflation makes the wealthy richer relative to the poor, but he doesn’t care, he just wants his NASDAQ shares to pump; these people are so transparent.
Stagflation
I got 132,000+ likes (!!) on this tweet in October:
This tweet I think did especially well because both sides of the political spectrum feel validated by it. It was retweeted into Marxist/communist twitter just as much as it was retweeted into MAGA twitter. Inflation is a bipartisan issue.
What the popularity of this tweet also points towards is that everyone knows we are entering a period of stagflation. The Atlanta Fed just reduced its estimate for Q3 GDP growth from ~7% to just ~0.2%, meanwhile consumer price rises continue to accelerate. Yep, looks like pretty obvious stagflation to me.
The reason I bring up stagflation in the first place is because much like I expect “fertilizer” to be a bigger story in the months to come, I also expect “stagflation” to be the next buzzword as well. It will be worth dedicating an article to it.
Timeseries Modelling with Python
Karlstack goes quantitative
Believe it or not, I have spent the past 6 months forecasting CPI based purely on holistic/qualitative judgment… AKA gut feeling. Now that my inflation roundup is cementing itself as a monthly feature, it makes sense to invest time and build a sophisticated econometric forecasting model, to augment my judgement. I am taking an iterative approach to building this sophisticated model, meaning that the best place to start is with a really simple model, a foundation which I can build upon in the coming months. I think it will be fun to build this model together! In fact, please leave a comment if you think there are any useful extensions to my model that I can implement next month, maybe an econometric twist or an added explanatory variable:
The first thing I did was to download the .csv file from the BLS website, then loaded and cleaned the data in my open-source Jupyter notebook:
The hard part is figuring out the optimal way to project each of these lines one period into the future, and then sum them using appropriate basket weights. I start with 4 standard econometric models, which spit out 4 results:
AR(1): 0.5
Moving Average: 0.5
ARMA: 0.5
Vector Auto Regression (VAR): 0.6
Remember that the benchmark I am trying to beat here is the Bloomberg consensus, which is estimating +0.6% for October. So, it is heartening to see that I have at least calibrated my code properly, if it is giving me plausible output of 0.5, 0.5, 0.5, 0.6. I will start backtesting next month.
Final Forecast
I think inflation will be either +0.5% or +0.6% for October, but traditionally I have been too hawkish and overshot my estimates. To compensate for this historical bias I therefore pick the lower end of the range, and I am officially forecasting +0.5% for October CPI.
I was shocked at how high the Bloomberg consensus is this month, +0.6% is a high estimate for them, they tend to be slow-moving and conservative. The fact that these mainstream bankers are pricing in a high number like +0.6% means inflation is really expected to run hot. Magic is in the air. Here are the odds on Kalshi and Polymarket:
I would bet on inflation being above 0.3%, and above 0.4%, but not above 0.5%.
My Personal Contribution To Fighting Inflation
When I launched the “paid option” a couple months ago, it was $8/month. I have now lowered this to $5/month! I am betting that the loss in revenue-per-person will be more than offset by increased subscribers:
What would be the best way to profit, assuming the bullish case for inflation is correct? Best I can come up is shorting a TIPS ETF: http://opcalc.com/DEu. Pretty good profits to be had if TIPS keeps increasing in price.
Well written and well thought out article once again. Keep up the good work.