Official CPI may tell us where inflation was. Real-time price trackers and market indicators may tell us where inflation is heading next.
KEY TAKEAWAYS
The Fed’s “data dependence” has a timing problem. GDP, unemployment, PCE, and CPI are important measures, but policymakers are looking at economic conditions that may already have changed.
There is an entire ecosystem of faster inflation indicators. Truflation, Cleveland Fed Nowcasting, Sticky-Price CPI, Trimmed Mean PCE, PriceStats, ISM Prices Paid, and TIPS breakevens can provide complementary information.
Tomorrow’s CPI matters, but the underlying composition matters more than the headline. Oil, core services, shelter, and potential tariff pass-through could reveal considerably more than a single year-over-year number.
The inflation dashboard currently sends mixed signals. Some alternative and market-based measures look relatively benign while sticky prices and manufacturing input costs continue to show pressure.
Investors should think in terms of an inflation mosaic rather than one statistic. No alternative indicator is perfect, but combining them can provide a more timely picture of the economy than relying exclusively on official releases.
MY HOT TAKES
“Data dependent” sounds more reassuring than it actually is. Depending on data is sensible; depending predominantly on backward-looking data while setting forward-looking policy creates an obvious problem.
Tomorrow’s CPI is important, but treating it as brand-new information is a mistake. Much of the economic regime it measures has already been visible through faster indicators.
The Fed probably watches far more information than appears in its official reaction function. The interesting question is not whether policymakers have alternative dashboards, but how much those dashboards actually influence decisions.
Inflation does not currently look like a simple “hot” or “cold” story. Trimmed and market-based measures look relatively calm while sticky prices and producer-level pressures remain difficult to dismiss.
The best investors should be doing exactly what the Fed ought to be doing: looking through the windshield. Official statistics remain essential, but investors can gain an informational advantage by understanding what more timely indicators are already saying.
You can quote me: “They are driving on a super highway by only observing the rearview mirror.”
Data dependence. That phrase is a Fed favorite. It is not new at all but has been coming up an awful lot lately, especially since Kevin Warsh took up the helm at The Bank. I can't tell you for sure, but I would make a high probability that Warsh has those words tattooed somewhere on his body or even a needlepoint of the words framed and hung in that special sunny corner of his home. Yeah, it's kinda his thing. First, I would say that I am happy to know that the Fed is using "data" to make important policy decisions 🤣–I would assume so–but happy that it is being declared, nonetheless. The noun "dependence" is where things get murky for most of us. It implies quite clearly–to me at least–that Fed policymakers will only react to...er, data.
For example, the Fed will not decide to raise, cut, or hold rates based on where it thinks the economy will be in 6 months. No. It will wait until it gets not one, but several bits of data before it changes policy meaningfully. Ok–I guess. But what data are we talking about? Well, if we look at the almost-certain-to-become-retired SEP reports from the Fed, we can get a clue, and none of this should surprise you yet. The Fed looks at the Unemployment Rate, Core PCE Price Index, and GDP as primary inputs into its "reaction function." Are you seeing the problem yet? Those numbers are about as fresh as those mass-produced cakes you buy off the shelf at the grocery store.
That GDP figure that has been bandying about for the last few weeks is from Q2, which ended over a month ago! Last Friday's unemployment rate was from last month and the last PCE print was based on prices in June. You may recall that energy prices were significantly lower in the last print due to easing tensions in the Iran conflict IN JUNE. That has obviously changed--and will likely change again...and again..and, um, again.
So, the Fed is making the most important economic and financial decisions–on our behalf–based on old data. They are driving on a super highway by only observing the rearview mirror. Not looking out the windshield and trying to decide how to avoid a pothole or roadkill on the road ahead. If your Uber driver did that, would it bother you? Of course, it would.
Thankfully, Kevin Warsh recognizes that the PCE Price Index is not necessarily the best data to depend on. He said as much in his last presser and elsewhere in the media. He has his own "shadow data!" However, he is not going to tell us what that is, out of fear that we may attempt to preempt his policies by observing his favorites. That would possibly be considered "forward guidance" to which he is religiously opposed.
Well my friends, that has left this economist ( 🙋 ) curious. I want to know what keeps him up at night, because it will determine how he steers his committee on policy. Are you curious what he and other economists might be secretly watching to inform them--give them at least some temporal advantage? Even if it's not "projected," at least it should reflect a more recent regime?
Tomorrow, we will be getting the Consumer Price Index / CPI from the Bureau of Labor statistics, and everyone agrees that it could be THE data point that moves the needle with Fed policy. That's not likely, but everyone–including my amazing mother-in-law–watches that number. To tell you the truth, she watches that number to get a jump on her social security COLA adjustment, which is literally based on CPI. She doesn't need to watch the release to know the monthly and annual changes in goods and services. If you are a longtime follower, you know that my mother-in-law tracks the price of EVERYTHING in real time, so honestly if you really want to know what's up, you just have to ask her. She is busy taking care of my father-in-law these days, which means she is unavailable to give you a forecast. SO, what do we know about these so-called alternative inflation indicators that may give us some color on tomorrow's likely-market-moving economic number and...well, reality. Buckle up and let's dive in.
Let's start with the one that market economists whisper about like it's a secret handshake: Truflation. This is a daily-updated, tech-built inflation gauge that scrapes real prices off the internet in real time instead of waiting for a government survey to catch up. No lag. No revisions six weeks later. Just a number that moves as fast as the actual economy does. And here's the kicker--it's been running noticeably cooler than official CPI for most of this year. If that's part of Warsh's "shadow data," it would explain a lot about why he's been dragging his feet on being the inflation hawk everyone expected him to be.
Then you've got the Cleveland Fed's Inflation Nowcasting model, which is about as close to "official" as shadow data gets, because it's literally produced by a regional Federal Reserve bank. It spits out running estimates for both CPI and PCE before the BLS ever opens its mouth. If any Fed official is peeking at something between meetings, this is probably it–it's built by their own extended family.
There's also the Atlanta Fed's Sticky-Price CPI, which strips out the jumpy stuff–gas, airfares, used cars–and isolates the prices that don't move much once they move. Rent. Insurance. Cable bills. The stuff that, once it goes up, stays up. That's the inflation that actually keeps a Fed chair awake, because sticky prices are the ones policy has the hardest time dislodging.
Don't forget the Dallas Fed's Trimmed Mean PCE either. It throws out the extreme outliers on both ends--the categories spiking and the ones cratering--and averages what's left. Think of it as inflation with the drama removed. Boring, sure. But boring is exactly what you want when you're trying to see through the noise of an oil shock or a tariff headline.
And speaking of headlines–the ISM Prices Paid indexes, both manufacturing and services, come out before CPI every single month and tell you what's happening in the pipeline before it ever reaches your receipt. Rising prices paid by factories and service providers today is basically a preview of the CPI print two or three months from now. It's the trailer before the movie.
There's also PriceStats, built off the old MIT Billion Prices Project, scraping online retail prices daily the same way Truflation does, just with a longer academic pedigree (if that means anything these days). And if you want to know what the actual market–real money on the line, not economists guessing–thinks inflation will be, you look at TIPS breakevens, the gap between regular Treasury yields and inflation-protected ones. It updates every second the bond market is open. Honestly, this is probably the one Warsh loses sleep over–the market grading his homework in real time, and lately it hasn't been generous with the grade.
None of these are "official." None are what the Fed will cite in a press conference. But together, they're the instrument panel that lets economists see a few weeks–sometimes months–further down the road than the rearview mirror the Fed is legally required to drive by. Not a crystal ball. More like night-vision goggles strapped onto old data.
So now, back to tomorrow--and to reality, as promised.
The July CPI comes out tomorrow morning at 8:30 AM Wall Street Time, and the whisper numbers have headline inflation coming in around 0.1% month-over-month, which nets out to roughly 3.4% year-over-year, a small step down from 3.5%. Core CPI–strip out food and energy–is expected around 0.2% for the month, landing near 2.5% annually. On paper, that sounds like more of the same slow grind toward the Fed's 2% target. But the paper doesn't tell you the real story this month.
The real story is oil. Crude spiked more than 20% in July after those US-Iran peace talks fell apart, and that's the exact opposite of what happened in June, when easing tensions pulled energy prices down and made the whole CPI report look tamer than it really was. That was the print the Fed leaned on for its last read of the world. It's already stale. Wednesday's number should show that reversal showing up in real time, right as the Fed is still digesting the old, cooler data.
Watch core services too. They came in surprisingly soft in June–transportation, medical, communications–and economists expect a rebound. Watch shelter, still the single biggest chunk of the index and the stickiest of the sticky prices we just covered. And watch electronics, because Apple's recent price hikes are exactly the kind of tariff pass-through that shows whether tariffs are truly "mitigated," as some banks hope, or just delayed.
Here's what actually matters for you, and not just for Wall Street. September rate odds are sitting at basically a coin flip right now between the Fed holding or hiking, and this CPI print, paired with last week's weak jobs report, is one of the last real inputs before that decision. If inflation runs hot because of the oil shock, that mortgage rate you're waiting to refinance stays put, or gets worse. Your credit card APR doesn't budge. And yes–my mother-in-law's COLA math gets a little more favorable, even if she already knew the answer before the government did.
That's the real absurdity of "data dependence." The Fed needs old data to make forward-looking decisions that affect your rent, your grocery bill, and your 401(k) tomorrow–not last quarter. Meanwhile, an entire ecosystem of real-time trackers exists that could give policymakers a few weeks' head start, and the official response is to treat those tools like state secrets, out of fear that admitting to them counts as "forward guidance."
My friends, it comes down to this: the Fed isn't ignoring real-time inflation data because it doesn't exist–it's ignoring it because acknowledging it would mean admitting the rearview mirror was never good enough in the first place. Tomorrow's CPI won't change that. It'll just be the next stale headline everyone treats like breaking news, while the real signal was already sitting there the whole time, for anyone willing to look out the windshield.
So here's where the tape actually reads heading into tomorrow. Truflation is sitting at 2.26% year-over-year as of this morning–comfortably below the 3.4% official CPI is expected to print, which is exactly why some economists think Wednesday's number could overstate where prices are really trending. The Cleveland Fed's own Nowcast, built by actual Fed researchers, has July CPI landing at 0.09% month-over-month and 3.42% annually, with core CPI at 0.21% and 2.52%--almost a bullseye match with Wall Street's consensus, so don't expect fireworks there. The Atlanta Fed's Sticky-Price CPI, last clocked in June, rose 2.8% year-over-year on both the headline and core cuts, proof that the stubborn stuff–rent, insurance, cable–isn't going anywhere fast. The Dallas Fed's Trimmed Mean PCE, also June, shows just 2.2% over the trailing 12 months, the tamest read of the bunch and the one doves point to when they argue inflation is basically licked. Meanwhile, ISM Manufacturing Prices Paid came in at 71.1 for July, down from 73.0 in June, but still deep in territory that says factories are paying up--pressure that hasn't fully worked its way to your receipt yet. And the market's own vote, the 10-Year TIPS breakeven, sits at 2.25% as of last week, telling you bond traders aren't panicking about a runaway inflation spiral, oil spike and all. Put it together and the picture is mixed on purpose–cooler on the market-based and trimmed measures, sticky and elevated everywhere prices don't easily come back down, and a factory-floor gauge still flashing amber. That's the real "reaction function," folks. Not the one number we'll get at 8:30 tomorrow morning.
YESTERDAY’S MARKETS
Stocks closed nearly flat yesterday, with the Dow off 126 points (-0.23%) to 53,910, the S&P 500 down -0.04%, and the Nasdaq slipping -0.32%, with Brent crude topping $86 a barrel after reopening talks for the Strait of Hormuz stalled over the weekend when Iran raised new demands. Nvidia and Apple each fell about 2% while Microsoft and Amazon led the gainers among the Mag 7. Traders largely sat on their hands ahead of tomorrow’s CPI report.
NEXT UP
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