(RPT)MNI INTERVIEW: Cleveland Fed Sees Higher CPI Than Market

(Repeats story first published on Sept 9)

The Cleveland Fed's inflation Nowcast sees August CPI coming in two-tenths higher on the month than market expectations, associate research director Ed Knotek told MNI, using a model that's outperforming professional forecasters through the pandemic.

The Nowcast estimates August CPI rising 0.1% on the month and 8.2% on the year, in a report due out Tuesday. Core CPI is seen increasing 0.5% on the month and 6.3% from a year earlier. Market forecasts have -0.1% for headline CPI and 0.3% for core.

More upside misses suggest even tighter monetary policy, and Cleveland Fed President Loretta Mester said on an MNI webcast this week it's far too soon to conclude inflation has peaked. Surging prices as the economy re-opened following Covid shutdowns surprised Fed officials and are one reason the FOMC embraced outsized rate hikes.

"When we look at how the model has performed compared with surveys of professional forecasters, either through the Philly Fed Survey of Professional Forecasters, or the Blue Chip consensus, the model has actually been performing pretty well," Knotek said. "It tends to outperform predictions from either of those two surveys, which are aggregating across many individuals."

GETTING THE NEXT ONE

The Nowcast predicts three separate components of inflation. The energy component leverages high frequency data on oil and gas prices, similar to what other forecasters use, while food and core inflation are time-series models that extrapolate from recent price moves.

While forecasters can look at a suite of models, news headlines and their best judgment on what weight to put on different factors from month to month, the Nowcast model has been fairly consistent since its conception eight years ago.

"It’s fair to say the forecast errors of the model’s predictions have increased since before the pandemic but that’s been true across forecasters in general," Knotek said.

Combined with the bank's Median CPI and Trimmed Mean CPI, which have been "somewhat elevated" at 6.3% and 7% respectively in July, they give policymakers a more robust view on where inflation is headed, Knotek said. "The benefit of the Nowcast is getting the very next reading right," he said.