Traders see inflation’s end where others don’t

Kalshi estimates lowest core inflation rate in years

Traders project headline inflation in July to be 0.20%, the same level as in June. A tick up in gas prices has kept headline steady; core inflation has been the real story, expected to come in even lower at 0.15%. This would be the second month in a row of core falling, and the second month in a row of the monthly rate being less than 2% annualized. This would be the lowest core inflation print since February 2021, when the omicron variant peaked, temporarily holding the economy’s recovery back. These estimates are in stark contrast with the Cleveland Fed’s Nowcast, which currently projects much higher inflation in July and August. Numbers like that (0.4%!) could realign the FOMC’s thoughts about rate hikes, whereas Kalshi’s are more consistent with the Fed’s standing-pat attitude. Though individual banks’ estimates vary, Kalshi’s is on the bottom end of estimates.

In June, Kalshi traders projected inflation to come in extra-low compared to the consensus – and won out. They’re taking the same view for July. What will happen tomorrow?

July inflation projection

Kalshi 

Cleveland Fed 

Barclays

Expert Consensus

Headline

0.20%

0.41%

0.25%

0.2%

Core

0.15%

0.40%

0.23%

0.2%

The consumer price index for July 2023 will be released at 8:30 AM ET tomorrow, August 10th.

Expected annual headline inflation is 3.09%.

About the Kalshi Whisper

The “whisper” number is a private, unofficial number that is circulated by bank analysts to their clients, including high net-worth individuals, Wall Street traders and hedge funds during the blackout period after the official consensus is published and before data is released. Analysts and economists at banks continue to revise their estimates during the blackout period, but share their new forecasts with a limited clientele. They call these late forecasts “whispers” because they’re not public and not broadly accessible. Kalshi forecasts serve as a more accessible market-driven “whisper” during the blackout period, before the release tomorrow.

The Kalshi Whisper comes from market prices based on CPI, core CPI, target fed funds markets and other relevant Kalshi markets. Markets are purely directional: traders purchase binary contracts on a central-limit order book that pay out based on conditions such as “CPI inflation exceeds 0.2% in November 2022”. From these contracts, one can simply extract the probability of any given release. For example, the probability of CPI inflation equaling 0.2% is equal to the price that CPI inflation exceeds 0.1% subtracted by the price of CPI inflation exceeding 0.2%. Current projections are based on the last traded price for contracts. Federal funds rate projections come from binary markets that pay out on the basis of the upper bound of the Federal Funds target range.

Kalshi markets have a history of accuracy. The median Fed projections have correctly identified the size of the rate hike for each meeting since the first Kalshi Fed projection in July 2021. The median CPI forecasts have been equally accurate or more accurate than the Bloomberg economist survey and the Cleveland Fed Nowcast in 11 of the last 13 months.

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