Is Everyone Using the Same Model to Predict CPI?

Introduction

Most economic models are predicting a 0.4% increase in the Consumer Price Index (CPI) for April. However, this consensus leaves the markets vulnerable to a significant shift if the actual inflation rate deviates from this prediction. The stability of the long gamma position in stocks could be jeopardized if the inflation outcome is substantial.

Analysis of CPI and PPI

The graph below illustrates a simple regression of the month-on-month CPI and Producer Price Index (PPI) final demand from 2009 to 2022, and extrapolates beyond this timeframe. It is evident from the model that it consistently underestimates the CPI. Based on the most recent final demand PPI data, the model predicts an April CPI of 0.36%, which rounds up to 0.4%.

Similar Predictions

This model implies that many people might be using a similar approach to predict the CPI. Using the PPI final demand estimate of 0.3% or the actual outcome of 0.5% results in an April CPI prediction of 0.3% or 0.4%, respectively, aligning with the majority of predictions.

Lack of Variance in Forecasts

Even if analysts are not using the PPI to estimate the CPI, there is a striking lack of variance in these forecasts. A CPI lower than 0.3% or higher than 0.4% could cause significant market movements in either direction, regardless of any revisions.

Conclusion

In conclusion, it seems that a majority of economic models are predicting a similar increase in the CPI for April. This lack of variance in predictions leaves the market vulnerable to significant shifts if the actual inflation rate deviates from the forecasted 0.4%. What are your thoughts on this matter? Do you think these predictions are accurate or is there room for error? Share this article with your friends and discuss. Don't forget to sign up for the Daily Briefing, which is every day at 6pm.