US Inflation forecast ahead of FED announcement

US Inflation forecast ahead of FED announcement

Read time
5 min
Published on
December 8, 2021

In October, US inflation exceeded expectations, with prices rising by 0.9% MOM (0.6% expected) from September.

The US Bureau of Labor Statistics will release awaited November inflation statistics on December, 10th 2021. In October, US inflation exceeded expectations, with prices rising by 0.9% MOM (0.6% expected) from September. The recently reelected FED chairman Jerome Powell announced that inflation may no longer be “transitory”, despite Omicron variant concerns. Persistent inflation could have large consequences on the global economy. Higher energy, material, labour costs are direct results that companies will need to consider. Central banks may raise interest rates as a response, which would induce increasing borrowing costs for companies and individuals.

The rapid upturn following the reopening of the global economy has sharply increased pressure on energy demand and goods supply chains that resulted in stark inflation. Several economists point at the exceptional fiscal measures taken by US authorities as the actual fuel for the inflation that we are currently witnessing. As a matter of fact, the world is facing inflation but nowhere is it as strong as in the US. The US stands out with the highest price increase in October, 6.22% from last year, compared to an average of 5.19% in the OECD.

Predictive models: remedy to uncertainty

The ongoing debate over whether inflation reflects short-term post-pandemic dynamics or a phenomenon set to last will continue. Access to accurate forecasting methods should be crucial for global actors to anticipate and aim at the most adequate decision-making. We make use of Indicio’s forecasting power to obtain a clearer view of the matter. We used indicators in line with our previous inflation forecast. In 2018, Indicio foresaw the inflation slowdown that Sweden faced until 2021.

S=Seasonally adjusted, N=Nowcasted, D=Disaggregated, M=Missing values

Forecasting US inflation post-Corona turmoil required adding new indicators such as Public Debt and Government Expenditure, which may have played a strong role in the recent inflation comeback. Indicio’s built-in indicator analysis tool helped us confirm the role of these variables in inflation modelling, as shown below. It allows the forecaster to automatically test significance in many variables to capture important information and isolate noise in the data. Fed with freshly cherry-picked variables, VAR models with different Lasso penalty structures yielded the best forecasting performances on the training data. Hence, we obtain high accuracy by accounting for these performances and weighting accordingly.

Inflation not expected to remain in 2022

As for the results, we expect prices to rise by 6.7% YOY in November 2021. The sharp uptrend seen in 2021 is set to slow down. According to our model, high inflation is not here to stay and will return to 0.2% MOM in 2022. Industries and markets can be reassured.

If you are eager to know more about how Indicio’s predictive models could improve your business decisions, feel free to find a slot that suits you in our calendar.

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