MacroX CPI Update

Key takeaways

• Using unique 1-3 month ahead indicators that enable MacroX to “see” the lower wage pressures and a non-accelerating economy ahead of others, we have consistently called for a “soft-landing” with 1-2 cuts
• Having nowcasted Apr Core CPI MoM to be +0.3% to our clients before the release, this week's inflation data update came in as we expected with the official data confirming our model. Core CPI YoY is now at its lowest level since April 2021
• This continued moderation of the inflation rate will enable the Fed to cut rates this year, as we've consistently said, with the 10y yield moving ~25bps lower so far in May
• More nowcasting less forecasting means we are not married to our view and closely monitoring for warnings of an acceleration in inflation such as low-wage sector wage pressures, which have lead overall wages this cycle, and for an acceleration in our growth nowcast.?

Supercore

One of the many things that give us confidence in our view is that both the levels and momentum of our wage pressures measure significantly explain the path of Supercore and Core Services ex-Housing CPI as the below chart shows:

Prevent overfitting - The dogs that should not bark!

An interesting way to test for overfitting is that constructed measures should only relate to appropriate and intuitive concepts. Equally important is that our measures should remain intuitive and NOT predict certain things. For example, our wage measure should not predict goods as well as services and our supply-chain pressure measure should not impact services. Reassuringly, we find that is the case with our wage measures excelling at CPI services and with 0 power over goods, while supply pressures explain the variation in PPI goods but not services.?

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