The Observatory

Potential CPI Disappointment Tomorrow

Welcome to The Observatory. The Observatory is how we at Prometheus monitor the evolution of the economy and financial markets in real-time. The insights provided here are slivers of our research process that are integrated algorithmically into our systems to create rules-based portfolios.

If you haven’t already, check out Episode 7 of the Prometheus Podcast! For this episode, we have another fantastic guest for you-Andy Constan. Andy is the Founder & CIO of Damped Spring Advisors, a macroeconomic research firm specializing in Hedge Fund consulting. Andy brings a great deal of experience to the table, having worked at some of the biggest macroeconomic hedge funds- including Bridgewater & Brevan Howard. Andy has also generated some serious alpha this year, using his flow-based approach to time key inflections in asset markets— so this episode is must-listen if you’re trying to navigate today’s volatile markets.

We will keep it brief— our systems expect a disappointment in consensus expectations of CPI tomorrow. Our systems expect a CPI print of 0.36% versus consensus expectations of 0.6%. The primary driver of this move is the potential for a decrease in non-durable goods inflation alongside a strong housing contribution. The balance of these two will determine the outcome of the print:

As we have said previously said, the balance between goods disinflation & services inflation will determine the pace & path of inflation. Particularly, this print will likely be driven by the balance between Non-Durable Goods (non-core items) & Housing:

Our expectation is that the pass-through from commodities into PPI & CPI will result in weaker-than-expected nondurable goods inflation:

Our systems have been good guides for inflation to come, & while this projection is fairly out-of-consensus, we find there is a significant chance of disappointment. This finding is bolstered by the historical accuracy of the our estimates:

Taking a step back, while we think there is indeed a significant chance of a CPI miss tomorrow, this is simply a function of idiosyncratic dynamics. On a cyclical basis, we continue to expect strong and persistent inflationary pressures. We show this below:

Particularly, we think it is important to note (as shown above) that shelter alone will contribute to inflation in excess of the 2% Fed target— not to mention other persistent inflation pressures. We show these pressures in the form of autocorrelations below:

Inflationary pressures are entrenched— but that doesn’t mean every print will be higher than the previous one. Stay nimble.