Alternative Macro Signals Newsletter - 1st Dec. 2021

Newsletter

1st Dec. 2021

No "Base Effects" Here

Base effects can be the tree that hides the forest in Inflation land.

No offense to anybody, but they are the degree zero of economic analysis.

It's not to say they do not exist, of course they do. It's accounting.

But sometimes, they can conveniently hide a lack of understanding in underlying factors. It's much easier to report on "base effects" than talk about the consequences of the just-in-time flow model collapse or lasting trade barriers or reduced labour force mobility which all contribute to the current inflation situation.

The eurozone is one of the wealthiest regions in the world. HICP inflation is an absolutely critical indicator for central bankers and markets: surely we can do better than reporting on the last twelve months to look at the short-term momentum?

So, if the goal is to look at near-term inflation, our take is data like the NIPI can help.

The NIPI leads US CPI inflation turning points (as shown here).

It does so for many other countries as well, including the euro area:

Beyond base effects: Eurozone NIPIs and HICP inflation momentum

Read more

FAQ: Aren't the NIPIs bounded?

No.

The NIPIs can go to 100. Or below zero, in theory.

Unlike the PMIs.

The NIPIs are scaled so that:

50 is for an equal volume of positive and negative news
100 (or 0) or for exceptionally strong or weak inflation newsflow, by historical standards

They should therefore be integrated variables, by construction - though they are not bounded.

100 would be like the maximum volume of inflation news seen in the history over a 30-day period but with every single news being positive.

That should have been a really rare event, but the exceptional volume of inflation news seen in recent months make it possible to go beyond 100.

Don't like the way we aggregate or scale the NIPI?

Or think this could be done in a way that better suits your needs?

We provide data as transparently as we can.

Our subscribers have access to the raw data, the basic entropy measures which we aggregate in the NIPI. Therefore, from our data, one can build indicators with different trade-offs (between noise and timeliness or between inflation perception and CPI accuracy, for instance).

Don't hesitate to reach out to discuss the details.

Earlier posts

Blog Post: "The NIPI as a predictor of US inflation: Nov-2021 update", 10/11/2021. Available here.
Newsletter: 700+ / day, Chinese news. 10/11/2021. Available here.
Newsletter: Second-round effects, UK Wages. 28/10/2021. Available here.
Presentation on "Information overflow...", Neudata "Macro and Credit Deep Dive", 21/10/2021. Slides here.
Blog Post: "Tracking narratives to forecast food prices", 13/10/2021. Available here.