Thursday, 23 March 2017

I have a new geometric oil model (well, 3 variants, models 8, 9 & 10) that have come up with slightly lower inflation figures than I had forecast before. I was looking into the possible uncertainties in the regression line analysis that undelies the models and there is some, due to the scatter in the data. Anyway, the best estimates are now shown on the following chart until July 2017:

This incorporates oil price data to February 2017 and also EIA forecast prices for the months up until July 2017.

I am now looking at models based on retail and wholesale gasoline prices (including current price action and EIA forecasts)

Also, the two videos are here (that were recorded in advance of the CPI report on 15 March):

Inflation Forecasting and Energy Prices Introduction to Concepts


CPI inflation forecast models for USA February and March 2017.

Saturday, 18 March 2017

Videos on inflation modelling February-March 2017.

I have made two YouTube videos, one on the relationship between energy prices, oil prices and inflation as measured by the Consumer Price Index (CPI) published in the USA and a second one that made forecasts for Feb 2017 and Mar 2017 CPI inflation figures using oil price data alone.

The estimate for Feb 2017 turned out to be a little high at 3.06% versus the 2.7% quoted by the Bureau of Labor Statistics. I still feel that the energy price change which is fuelled by a +100% move in oil year over year from the Feb 2016 low to the Feb 2017 high has not been fully factored in (the oil price change is +75% of you use monthly average prices). I am now developing a new gasoline based model that looks promising as an alternative to the oil price based model.

The two videos are here:

Inflation Forecasting and Energy Prices Introduction to Concepts


CPI inflation forecast models for USA February and March 2017.

Wednesday, 15 March 2017

Gold analysis shows $1145 target still in play.

The $1145 gold target that I have mentioned on my recent post is still in play. Gold is struggling to hold $1200 over the past couple of days and has already slipped back below the key level of $1224, which was the yearly high as far back as 2009! I need an eight year chart to look at that old price action, so gold has gone nowhere for nearly 8 years. That has been an undeniable bear market.

Note how the gold price action has fallen out of smaller black pitchfork. Support along the bottom line is now resistance (orange circles). The bearish move came after Trump's election victory (red circle). 

Along the larger and perhaps more significant blue pitchfork, price hit $1124 along the bottom line as I suggested was possible many weeks ago. Is it going to that line again at $1145?

Possible factors:
Rising inflation (US CPI report today) - bullish?
US Interest rate hike possible this week - bearish or not?
Dutch general election.
US Debt Ceiling issue.

Bearish potential target: $1145 at bottom line of blue pitchfork.
Bullish potential target: $1250 to resistance at bottom line of black pitchfork.

Wednesday, 8 March 2017

Inflation projection based on EIA current WTIC oil data and forecasts.

No explanations: here is a sneak peek of the chart.

Inflation to Dec 2019 might look like this if the EIA oil price forecasts prove correct (i.e. stationary to very slightly climbing oil prices for the next 21 months.

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Monday, 27 February 2017

CPI Inflation Model - USA CPI-U inflation forecasts for Feb & Mar 2017. Spike over 3% likely.

I have compiled my first inflation forecast report forecasting 'Headline' year-over-year all items CPI inflation for all urban consumers (CPI-U) in the USA. This includes forecasts of February and March 2017 forecasts. The actual inflation figures will be announced by the Bureau of Labor Statistics (BLS) on 
  • 15 March 2017 (CPI for Feb 2017) and
  • 14 April 2017 (CPI for Mar 2017) respectively.
The inflation model forecasts are now given at the bottom of this post. Most applications of the model give 3%+ for both months.

In addition to the forecasts based upon my proprietary model, the report shows correlations between different components of the CPI statistics and demonstrates clearly the significance of energy prices in determination of CPI figures for the past three years, with many charts included. All of the data used are year-over year (y-o-y) figures.

I am also preparing a second report, which will refine the model after the Feb 2017 CPI inflation announcement on 15 March and will also provide potential inflation forecast scenarios covering the whole of the remainder of 2017. This second report should be available in late March.

The importance of energy prices to the level of CPI is crucial at this time because most other components of the CPI (services, food, commodities / apparel / durable goods categories have shown low volatility over this time period. There is therefore an opportunity to use energy prices to forecast future CPI inflation in this environment. For example, services inflation is relatively constant at around +3% and has contributed very little to the changes in overall inflation in the past couple of years.

I believe that February 2017 CPI inflation figure announced on 15 March is going to be a crucial announcement that could have a considerable effect on markets if my forecast is correct. Although I have used data from the past three years in my model, there is still some uncertainty in the upside to the CPI energy component since year over year energy prices increases have been significant only in the January 2017 inflation report so far, despite the bottoming of the oil price in February of 2016.

[I have posted a rehearsal of a presentation on this subject on YouTube at: - please forgive the shaky hand held camera!]

Once the Feb 2017 inflation figures are announced further refining of the model will be possible and I intend to publish a second report later in March to be summarized on this blog.

The basis of the two reports is that CPI is critically linked to energy prices and energy prices are strongly correlated to changes in the oil contract price. The oil price action alone is giving a strong indication of the magnitude and direction of changes in the inflation rate. This has not always been true historically but in his period where the oil market has turned quite sharply in direction there is a strong relationship.

Here are a couple of charts from the first report:

Figure 1: Correlation of CPI All Items index with energy sector price changes. Note that Core CPI and Services prices have contributed very little to variations in the CPI in the past 3 years and the vast majority of CPI changes are due to energy prices:

Figure 2: The turnaround in oil prices in 2014-2017 showing year over year changes:


UPDATE 2017-03-02

Inflation forecasts from my first two models are as follows. These are obtained purely from year over year moves in the WTIC oil price based on the correlation between CPI and energy and oil prices over the past 3 years.

Model 1 gives forecasts for inflation up to 2 months in advance.

Model 1 gives forecasts for inflation up to 1 month in advance.

Model 1:
Feb 2017
(BLS release 15 Mar 2017)
Mar 2017
(BLS release 14 Apr 2017)
CPI year over year High estimate
CPI year over year  Low estimate

Model 2:
Feb 2017
(BLS release 15 Mar 2017)
Mar 2017
(BLS release 14 Apr 2017)
CPI year over year High estimate
CPI year over year Low estimate

Two more models are currently being tested. These further forecasts will be posted soon but the results are not too far different from Model 1. Then comes the task of modelling inflation scenarios to the end of 2017.

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Thursday, 5 January 2017

Gold pitchfork worked a treat, $1120s target at lower line almost reached.

I have been waiting to see if the downtrend in gold would go all the way to the bottom of the pitchfork that I originally drew in January 2016 - and it did. Will it hold?

Actually, I have been looking at two forks. Both seem to sum up aspects of the trading. Earlier (Nov 2016) I had this chart with initial target of $1177 and final possible target of $120 at the bottom of the larger fork:
Note that the confluence of the two median lines marked the moment of the crash, right non US election day + 1.

As of 5 January 2017, the lower line near $1124 has not been fully tested though there may be two tests of a slightly higher parallel line just visible at lower right:

Putting the small pitchfork back in we can see the price at $1181 is still well below the lower line of that fork and needs about $1220 to re-enter it. In fact, it would be possible that an outside parallel to that small fork coule also be in play near $1124, about the same distance below the lower line as half the width of the small fork:

So, the bull run isn't fully dead yet. $1180 is a key resistance level (that was support in June and December 2013) and needs to be exceeded on a closing basis. Any move below $1124 would kill this bull rally pretty much, I feel since it would break an uptrend structure (the large fork) that has been in formation since the left hand end of this chart at the end of 2014 (2 years).

Saturday, 26 November 2016

USDX chart from March 2013 with Price objective of 102!

USDX point and figure chart from March 2013 with Price objective of 102! This target flipped to 75 near the end of 2013 for just a little while, then became back in early 2014, when the dollar was in the low 80s and then what happened? The dollar has gone to 102!