Leading Indicators for Inflation

Leading Indicators of Inflation

Summary

leading indicators – those that provide a glimpse into future inflation trends. Here are some key ones we track at Omega Squared Capital Management:

  • Commodity Prices:

    • Broad Commodity Indices: A general increase in commodity prices, especially industrial metals and agricultural products, often precedes broader inflationary pressures.
    • Oil Prices: Given its pervasive use in production and transportation, crude oil price movements have a strong correlation with future inflation. Keep a close eye on benchmarks like WTI and Brent crude.

  • Producer Price Index (PPI): PPI measures price changes at the wholesale level. Increases in PPI can signal that businesses are facing higher costs, which they may pass along to consumers. Pay particular attention to PPI for finished goods and intermediate goods these act as a gauge of input costs for businesses.

  • Inflation Expectations:

    • Surveys: Consumer and business surveys, like the University of Michigan Consumer Sentiment Survey, provide insights into expected inflation. If expectations become unanchored, it can influence wage and price-setting behavior, creating a self-fulfilling prophecy.
    • Breakeven Inflation Rates: Derived from the difference between yields on nominal Treasury bonds and inflation-protected Treasury securities (TIPS), these rates reflect market-based inflation expectations.

  • Money Supply Growth: While the relationship is debated, excessive money supply growth can fuel inflation. Monitor measures like M2 to assess the potential for future inflationary pressures.

  • Import Prices: In a globalized economy, import prices influence domestic inflation. A weakening currency or rising prices in major exporting countries can contribute to inflation.

    • US Dollar: The dollar’s exchange rate plays a significant role in influencing import pricing. A stronger dollar makes foreign goods cheaper for U.S. buyers, while a weaker dollar makes them more expensive.

  • Economic Slack: Measures like capacity utilization and the output gap can indicate inflationary pressures. As the economy approaches full capacity, the risk of demand-pull inflation increases.

  • Wage Growth: Average hourly earnings and other wage measures can signal potential cost-push inflation. Rapid wage increases, especially when productivity growth is lagging, can lead to higher prices.

Inportant Considerations:
  • No single indicator is perfect. Use a combination of leading indicators to get a more comprehensive view.
  • Time lags vary. The lead time between these indicators and actual inflation can be unpredictable.
  • Economic context matters. Interpret these indicators in the context of the overall economic cycle and other relevant factors.



Commodity Prices

Commodities often act as a leading indicator for inflation because they represent raw materials and essential inputs for a wide range of goods and services. When commodity prices rise, producers face increased costs, which they frequently pass along to consumers in the form of higher prices for finished products. This ripple effect through the supply chain can fuel broader inflationary pressures in the economy. Additionally, commodity prices are highly sensitive to global supply and demand dynamics, as well as geopolitical events, making them an early warning system for potential inflationary trends. By monitoring commodity price movements, we can gain valuable insights into future inflation and adjust our investment strategies accordingly.



Broad Commodity Indices

The Thomson Reuters/Core Commodity CRB Index is a representative indicator of global commodity markets. The index is made up of 19 commodities, including:

  • Crude, natural gas, and gasoline
  • Heating oil
  • Sugar, cotton, coffee, cacao, and oj
  • Gold, silver, copper, aluminum, and nickel
  • Soybean, wheat, and corn
  • Live cattle and lean hog
Figure 1: The Thomson Reuters/Core Commodity CRB Index is a representative indicator of global commodity markets. The index is made up of 19 commodities
Apr 11 Apr 04 Mar 28 Mar 21 Mar 14 Mar 07 Feb 28 Feb 21 Feb 14 Feb 07 Jan 31 Jan 24
Δ TR/CRB -- -18.4 1.09 3.10 -0.37 1.22 -9.39 -0.86 4.56 2.56 -4.88 -1.24
% Δ TR/CRB -- -6.0 0.36 1.03 -0.12 0.41 -3.05 -0.26 1.49 0.85 -1.57 -0.40
Table 1: Weekly movements in the TR/CRB Index.



Oil Prices

Oil’s pervasive role in the global economy makes its price a leading indicator for inflation. Crude oil is a critical input for transportation, manufacturing, and energy production. When oil prices rise, these increased costs ripple through the supply chain, ultimately leading to higher prices for a wide range of goods and services. This impact on production and transportation expenses influences the cost of everything from groceries to airline tickets. Furthermore, oil price fluctuations are often driven by global supply and demand dynamics, as well as geopolitical events, providing an early signal of potential inflationary pressures before they fully materialize in consumer prices.

Figure 2: SCrude Oil Prices: West Texas Intermediate (WTI) - Cushing, Oklahoma
Figure 3: Crude Oil Prices: Brent - Europe
Figure 4: Conventional Gasoline Prices: U.S. Gulf Coast, Regular
Figure 5: Reformulated Gasoline Blendstock for Oxygenate Blending (RBOB) Prices: Regular Gasoline: Los Angeles
Apr 11 Apr 04 Mar 28 Mar 21 Mar 14 Mar 07 Feb 28 Feb 21 Feb 14 Feb 07 Jan 31 Jan 24
Δ WTI Curde Oil -- 2.13 1.22 1.09 0.14 -2.68 -0.75 -0.33 -0.27 -1.52 -2.13 -3.59
Δ Brent Crude Oil -- 2.54 2.05 0.70 -0.55 -2.27 -0.12 -0.31 0.51 -2.43 -1.60 -4.31
Δ Gasoline Prices -- 0.06 0.05 0.04 0.08 -0.02 -0.06 -0.02 -0.02 0.03 0.03 -0.08
Δ RBOB Prices -- 0.11 0.36 0.13 0.16 0.07 -0.43 -0.06 -0.03 0.20 0.15 0.05
Table 2: Weekly movements in major energy prices.

Energy prices and raw materials often gives us a clue to the trend in our next leading indicator the Producer Price Index.



Producer Price Index (PPI)

The Producer Price Index (PPI) gauges the average change in selling prices received by domestic producers for their output. It captures price movements at the wholesale level, before goods and services reach consumers. This is why it’s considered a leading indicator of inflation:

  • Early Signal of Cost Pressures: PPI tracks price changes in raw materials, intermediate goods, and finished goods. Increases in these input costs often precede broader inflationary pressures in the economy. Essentially, PPI provides an early warning system for rising costs that are likely to be passed along the supply chain.
  • Predictive Power for CPI: Changes in PPI can foreshadow future changes in the Consumer Price Index (CPI), which measures inflation at the retail level. When producers face rising input costs, they often pass those costs on to consumers in the form of higher prices for final goods and services.
  • Insight into Specific Sectors: PPI data is available for various industries and commodity groups. This allows for a granular analysis of inflationary pressures within specific sectors of the economy, providing valuable insights into potential bottlenecks or supply-demand imbalances.
Figure 6: This chart illustrates the year-over-year percentage change in the Producer Price Index (PPI) from 1987 to 2024, providing a visual representation of inflationary trends in the United States over nearly four decades. Key economic events and periods are highlighted, including the Gulf War, the ‘Soft Landing’ of the mid-1990s, the Tech Bubble, the Financial Crisis, and the COVID-19 Pandemic. The chart also includes a 12-month moving average to smooth out short-term volatility and reveal underlying trends.
Apr-25 Mar-25 Feb-25 Jan-25 Dec-24 Nov-24 Oct-24 Sep-24 Aug-24 Jul-24 Jun-24 May-24
PPI -- -- 1.88 2.35 1.42 0.13 -0.83 -2.41 -0.86 1.37 0.81 0.65
Apr-25 Mar-25 Feb-25 Jan-25 Dec-24 Nov-24 Oct-24 Sep-24 Aug-24 Jul-24 Jun-24 May-24
Δ Change in PPI -- -- -0.46 0.93 1.28 0.96 1.59 -1.55 -2.23 0.56 0.16 0.62
Trend in PPI -- -- Up Up Up Up Up Down Up Up Up Up
Here’s how the leading mechanism works:
  1. Rising Input Costs: Producers experience increases in prices for raw materials, energy, or intermediate goods.
  2. PPI Increase: This is reflected in a rising PPI.
  3. Passing on Costs: To maintain profit margins, producers raise the prices of their goods and services.
  4. CPI Increase: These higher prices are eventually reflected in the CPI as consumers pay more for goods and services.



Inflation Expectations

Inflation expectations are crucial for the Federal Reserve because they heavily influence economic behavior. If people anticipate rising inflation, they may adjust their pricing and wage demands accordingly, potentially creating a self-fulfilling prophecy. This makes it harder for the Fed to maintain price stability, its primary mandate. Anchored inflation expectations, around the Fed’s 2% target, are essential for policy effectiveness. When the public trusts the Fed’s commitment to price stability, monetary policy tools like interest rate adjustments work more smoothly.

Essentially, the Fed’s credibility is tied to its ability to manage these expectations. They use clear communication, forward guidance, and decisive policy actions to keep inflation expectations in check. This fosters a stable economic environment where businesses and consumers can operate with greater certainty. Failing to manage expectations could lead to uncontrolled inflation or a deflationary spiral, both detrimental to sustainable economic growth.



Inflation Expectation Surveys

Inflation expectation surveys are vital tools for understanding and forecasting future inflation trends. These surveys provide valuable insights into the mindset of consumers and businesses, revealing their anticipated price changes. This information is critical for central banks like the Federal Reserve, as well as investors and businesses, who rely on these surveys to make informed decisions. For the Fed, these surveys help gauge the effectiveness of monetary policy and guide future actions to maintain price stability. Investors use this data to assess risk and allocate assets effectively, while businesses factor it into pricing strategies and wage negotiations. By monitoring inflation expectations, we gain a forward-looking perspective on potential inflationary pressures and can proactively respond to maintain economic stability.

Figure 7
Apr-25 Mar-25 Feb-25 Jan-25 Dec-24 Nov-24 Oct-24 Sep-24 Aug-24 Jul-24 Jun-24 May-24
Michigan -- -- 4.3 3.3 2.8 2.6 2.7 2.7 2.8 2.9 3 3.3
Apr-25 Mar-25 Feb-25 Jan-25 Dec-24 Nov-24 Oct-24 Sep-24 Aug-24 Jul-24 Jun-24 May-24
Δ Change -- -- 1 0.5 0.2 -0.1 0 -0.1 -0.1 -0.1 -0.3 0.1
Trend -- -- Up Up Down Down Down Down Down Down Down Down
Figure 8: Federal Reserve Bank of Cleveland, 2-Year Expected Inflation, Federal Reserve Bank of St. Louis;
Apr-25 Mar-25 Feb-25 Jan-25 Dec-24 Nov-24 Oct-24 Sep-24 Aug-24 Jul-24 Jun-24 May-24
2-Year -- 2.26 2.61 2.55 2.5 2.4 2.21 2.21 2.29 2.51 2.59 2.73
Apr-25 Mar-25 Feb-25 Jan-25 Dec-24 Nov-24 Oct-24 Sep-24 Aug-24 Jul-24 Jun-24 May-24
Δ Change -- -0.34 0.06 0.05 0.1 0.2 -0.01 -0.08 -0.21 -0.08 -0.14 0.17
Trend -- Down Up Up Up Down Down Down Down Down Up Up
Figure 9: Federal Reserve Bank of Cleveland, 10-Year Expected Inflation, Federal Reserve Bank of St. Louis;
Apr-25 Mar-25 Feb-25 Jan-25 Dec-24 Nov-24 Oct-24 Sep-24 Aug-24 Jul-24 Jun-24 May-24
10-Year -- 2.3 2.47 2.44 2.32 2.33 2.12 2.12 2.16 2.37 2.37 2.45
Apr-25 Mar-25 Feb-25 Jan-25 Dec-24 Nov-24 Oct-24 Sep-24 Aug-24 Jul-24 Jun-24 May-24
Δ Change -- -0.17 0.02 0.12 -0.01 0.22 -0.01 -0.04 -0.2 0 -0.08 0.11
Trend -- Down Up Up Up Up Down Down Down Up Up Up
Figure 10: Federal Reserve Bank of Cleveland, 30-Year Expected Inflation, Federal Reserve Bank of St. Louis;
Apr-25 Mar-25 Feb-25 Jan-25 Dec-24 Nov-24 Oct-24 Sep-24 Aug-24 Jul-24 Jun-24 May-24
30-Year -- 2.44 2.54 2.52 2.44 2.46 2.32 2.32 2.34 2.47 2.46 2.51
Apr-25 Mar-25 Feb-25 Jan-25 Dec-24 Nov-24 Oct-24 Sep-24 Aug-24 Jul-24 Jun-24 May-24
Δ Change -- -0.09 0.01 0.08 -0.01 0.14 0 -0.02 -0.13 0.01 -0.05 0.06
Trend -- Up Up Up Up Up Down Down Down Up Up Up



Break Even Inflation Rates

Breakeven inflation rates, derived from the difference between nominal and inflation-protected Treasury yields, provide crucial insights into market-based inflation expectations. These rates reflect the average inflation rate the market anticipates over the life of the bonds. This information is vital for the Federal Reserve as it gauges the effectiveness of monetary policy and the credibility of its commitment to price stability. If breakeven rates deviate significantly from the Fed’s target, it signals a potential disconnect between market expectations and the Fed’s policy intentions, requiring adjustments to communication or policy actions. Furthermore, investors rely on breakeven rates to assess inflation risk and make informed asset allocation decisions, influencing investment strategies and overall market dynamics.

Figure 11: 10-Year Breakeven Inflation Rate
Figure 12: 5-Year, 5-Year Forward Inflation Expectation Rate
Figure 13: 5-Year Breakeven Inflation Rate
Apr 11 Apr 04 Mar 28 Mar 21 Mar 14 Mar 07 Feb 28 Feb 21 Feb 14 Feb 07 Jan 31 Jan 24
Δ Breakeven inflation rate 10-Year Treasury -- -0.19 0.04 0.03 -0.03 -0.05 -0.04 -0.01 0.01 0.00 -0.01 0.02
Δ Inflation expectations 5-Year Forward 5 -- -0.14 0.01 0.03 -0.02 -0.04 -0.05 -0.01 -0.01 -0.05 -0.04 0.04
Δ Breakeven inflation rate 5-Year Treasury -- -0.24 0.07 0.03 -0.04 -0.06 -0.03 -0.01 0.03 0.05 0.02 0.00
Table 3: Weekly movements in inflation expectations.



Money Supply

Money supply represents the total amount of money circulating within an economy, encompassing cash, bank deposits, and other liquid assets. Central banks, like the Federal Reserve, can influence the money supply through tools like interest rates and open market operations (buying or selling government bonds). Essentially, increasing the money supply injects more money into the economy, while decreasing it reduces the amount in circulation.

Excessive growth in the money supply can fuel inflation. When the amount of money circulating significantly outpaces the production of goods and services, it creates an environment where there’s more money chasing the same amount of goods. This increased demand puts upward pressure on prices, leading to inflation. Think of it as a basic supply and demand dynamic – an oversupply of money relative to available goods can drive prices higher. However, it’s crucial to remember that the relationship between money supply and inflation is complex and influenced by various other economic factors.

Note

The Federal Reserve has discontinued releasing this data on a weekly basis, now the data is released monthly. While the data is still relevant, the delay can cause some issues on timing.

Figure 14: Seasonaly adjusted M2 year over year growth rate.
Note

The Federal Reserve has discontinued releasing this data on a weekly basis, now the data is released monthly. While the data is still relevant, the delay can cause some issues on timing.

Figure 15: Seasonaly adjusted M1 year over year growth rate.
Apr 11 Apr 04 Mar 28 Mar 21 Mar 14 Mar 07 Feb 28 Feb 21 Feb 14 Feb 07 Jan 31 Jan 24
Δ Yr/Yr Growth of M1 -- -- -- -- -- -0.25 0.05 0.10 0.46 -0.43 -0.19 0.32
Δ Yr/Yr Growth of M2 -- -- -- -- -- -0.21 0.07 0.09 0.39 -0.49 -0.21 0.26
Table 4: Weekly movements in money supply growth.



Import Prices

Import prices can act as a leading indicator for inflation because they reflect the cost of goods and services produced abroad before they reach domestic consumers. When import prices rise due to factors like a weaker domestic currency, increased global demand, or supply chain disruptions in exporting countries, those higher costs are often passed along to consumers in the form of increased prices for final goods and services. This transmission of price pressures from the global market to the domestic economy can fuel broader inflationary trends. Therefore, monitoring import prices provides valuable insights into potential inflationary pressures that may materialize in the future, allowing for proactive measures to mitigate their impact.

Figure 16: Import Prices
Apr-25 Mar-25 Feb-25 Jan-25 Dec-24 Nov-24 Oct-24 Sep-24 Aug-24 Jul-24 Jun-24 May-24
Import Price Index -- -- 2 1.79 2.17 1.36 0.71 -0.07 0.78 1.72 1.58 1.29
Apr-25 Mar-25 Feb-25 Jan-25 Dec-24 Nov-24 Oct-24 Sep-24 Aug-24 Jul-24 Jun-24 May-24
Δ Change -- -- 0.21 -0.37 0.8 0.65 0.78 -0.85 -0.94 0.14 0.29 0.29
Trend -- -- Up Up Up Up Up Up Up Up Up Up
Figure 17: Core Import Prices
Apr-25 Mar-25 Feb-25 Jan-25 Dec-24 Nov-24 Oct-24 Sep-24 Aug-24 Jul-24 Jun-24 May-24
Core Import Price Index -- -- 1.39 1.11 1.77 1.96 2.14 1.67 1.21 0.93 0.74 0.18
Apr-25 Mar-25 Feb-25 Jan-25 Dec-24 Nov-24 Oct-24 Sep-24 Aug-24 Jul-24 Jun-24 May-24
Δ Change -- -- 0.28 -0.66 -0.19 -0.19 0.47 0.47 0.28 0.19 0.56 -0.09
Trend -- -- Up Up Up Up Up Up Up Up Up Up



U.S. Dollar

The dollar’s exchange rate significantly influences import prices due to the mechanics of international trade. Since imports are typically priced in the currency of the exporting country, U.S. importers must exchange dollars for that foreign currency to complete the purchase. Therefore, a stronger dollar means U.S. importers can buy more foreign currency with each dollar, effectively lowering the cost of imported goods in dollar terms. Conversely, a weaker dollar reduces the purchasing power of U.S. importers, making those same goods more expensive. This dynamic has a direct impact on inflation because changes in import prices feed through to consumer prices. A stronger dollar can help curb inflation by making imported goods cheaper, while a weaker dollar can contribute to inflation by raising the cost of imports. Consequently, the dollar’s exchange rate is a key factor in the complex interplay of forces that determine inflation dynamics.

Figure 18: Seasonaly adjusted Nominal Broad U.S. Dollar Index.
Figure 19: Seasonaly adjusted Nominal Advanced Foreign Economies U.S. Dollar Index
Figure 20: Seasonaly adjustedNominal Emerging Market Economies U.S. Dollar Index
Apr 11 Apr 04 Mar 28 Mar 21 Mar 14 Mar 07 Feb 28 Feb 21 Feb 14 Feb 07 Jan 31 Jan 24
Δ Broad USD -- -- 0.15 0.56 -0.27 -2.24 1.14 -0.02 -1.26 -0.05 0.99 -1.99
Δ Advanced Economies USD -- -- -0.25 0.32 0.11 -3.18 1.07 -0.02 -1.44 -0.28 0.93 -1.86
Δ Emerging Market USD -- -- 0.59 0.82 -0.69 -1.25 1.22 -0.02 -1.10 0.19 1.05 -2.16
Table 5: Weekly movements in U.S. Dollar exchange rates.



Cryptocurrencies

Cryptocurrency’s role in inflation, the dollar, and import prices is complex and still evolving, but here are some key considerations:

  • Inflation Hedge: Some proponents argue that cryptocurrencies, particularly Bitcoin with its finite supply, could act as a hedge against inflation. The idea is that as fiat currencies like the dollar lose purchasing power due to inflation, cryptocurrencies might retain their value or even appreciate. However, recent data suggests that cryptocurrencies haven’t consistently behaved as an effective inflation hedge. Their prices have shown high volatility and correlation with risk assets like tech stocks, rather than demonstrating a clear inverse relationship with inflation.

  • Impact on the Dollar: The rise of cryptocurrencies could potentially challenge the dollar’s dominance in international trade and finance. If cryptocurrencies gain wider acceptance as a medium of exchange and store of value, it could reduce demand for the dollar, potentially leading to a weaker dollar.

Cryptocurrency’s role in inflation, the dollar, and import prices is still developing. While it has the potential to disrupt traditional financial systems and influence global trade, its actual impact remains limited. Further research and observation are needed to fully understand the long-term implications of cryptocurrencies for the global economy.

Figure 21: Coinbase Bitcoin
Figure 22: Coinbase Bitcoin Cash
Figure 23: Coinbase Ethereum
Figure 24: Coinbase Litecoin
Apr 11 Apr 04 Mar 28 Mar 21 Mar 14 Mar 07 Feb 28 Feb 21 Feb 14 Feb 07 Jan 31 Jan 24
Δ Bitcoin to USD -5289.34 881.42 -1235.20 -499.43 -1855.23 187.93 -10563.36 -1014.82 1120.69 -4147.60 -4109.71 298.56
Δ Bitcoin Cash to USD -32.56 0.64 -18.93 -20.06 -43.53 74.71 -9.84 -12.13 9.92 -80.73 -41.49 -20.51
Δ Ethereum to USD -227.24 -22.30 -152.96 42.74 -265.42 -13.48 -546.99 69.92 60.96 -484.16 -201.59 14.30
Δ Litecoin to USD -12.14 -2.78 -5.93 -1.11 -9.81 -22.01 -1.65 -7.95 29.17 -13.30 -5.86 -1.39
Table 6: Weekly movements in Cryptocurrencies.
Last Updated

Last updated on April 07, 2025