Will lower-than-expected inflation placate the Fed?

Nowcast models of inflation suggest that inflation will be lower than expected in the next two monthly reports. However, it remains to be seen whether this will placate the Fed.

President Biden has drawn attention to lower gasoline prices, which could lead to further mild CPI ... [+] reports, but will this be enough for the Fed? (Photo by Jim WATSON / AFP) (Photo by JIM WATSON/AFP via Getty Images)AFP via Getty Images
Although lower gasoline prices could lead to further mild CPI reports, it remains to be seen whether this will be enough to satisfy the Fed. President Biden will no doubt be closely monitoring the situation in order to ensure that the economy remains on track.

It's possible to derive reasonable inflation forecasts ahead of the official release dates. The Cleveland Fed does this and the data for upcoming CPI reports appears like it may be good for markets. This is good news for investors, as it means that they can make informed decisions about where to allocate their resources. It also provides a degree of certainty in an otherwise uncertain economic environment.

Nowcasting inflation: what you need to know

The ability to nowcast economic releases can provide valuable insights into future trends. This paper explains how this is done, using publicly available data to form an estimate of where inflation might land in the official CPI report before it arrives. This information can be used to make better investment decisions and help businesses to plan for the future.

Inflation for August and September: Where will it land?

The Nowcast currently suggests that U.S. inflation may come in at 0.06% month-on-month so essentially flat for August 2022, when the data is reported on September 13. That would be largely good news. This is good news for consumers as it means that prices for goods and services will not increase significantly in the near future.

The Cleveland Fed's model predicts that inflation will pick up in September, potentially leading to higher prices in October. This would be a welcome change from the low levels of inflation seen in recent months, though it is still early to say for certain how things will play out.

It is unfortunate that inflation remained relatively low in the late summer of 2021, but it did begin to increase in October and subsequent months. This month-on-month improvement is encouraging, but more needs to be done to ensure that prices continue to rise at a healthy rate.

It is likely that the headline U.S. inflation rate will remain at around 8% year-on-year, despite month-on-month inflation easing sequentially. If inflation remains low into fall and winter, then the year-on-year inflation number would start to come down as some bigger month-on-month inflation numbers from late 2021 drop out of the 12 month inflation series.

Will the Fed's stimulus efforts be enough to prop up the economy?

The Fed's commitment to a rate hike later this month is a positive sign for the economy. This move will help to keep inflation in check and encourage spending and investment. The 75bps move up in interest rates is the most likely scenario, but a 50bps move is still possible. This increase will help to keep the economy on track and ensure stability in the financial markets.

The Fed is watching inflation closely, as it is a key indicator of the health of the economy. While energy prices have been volatile recently, the Fed is primarily concerned with core inflation, which has been stubbornly above 2%. The Fed wants to be cautious in its assessment of inflation and will continue to monitor prices closely.

The Fed's decision to raise interest rates remains uncertain, as inflation continues to hover around 2%. However, reports of decreasing prices could help to ease the Fed's concerns and lead to a decision to keep rates steady.