December headline inflation: Kalshi markets project that inflation will be -0.1% month-over-month in the month of December. There is modest uncertainty: our markets project that there is only a 33% chance that the estimate will be exactly -0.1%, with a 22% chance of -0.2%, and a 19% chance of 0.0%. As a result, inflation will likely fall to 6.4% year-over-year, the lowest level since October 2021.
December core inflation: Core inflation, which does not include December’s decline in gas prices, is projected to be 0.2%, with a 20% chance of 0.1%, 28% chance of 0.2%, and 20% chance of 0.3%. 0.2% would represent the second consecutive month of on-target core inflation prints, and a substantial decline from the sky-high prints of 0.6% and 0.7% during summer 2022.
2023 inflation: Looking forward, Kalshi markets expect the cooling to continue, with a 0.2% headline print in the January print released February 14 (median forecast for January core inflation is split evenly between 0.2% and 0.3%). Overall, Kalshi markets project inflation in 2023 to be 3.0%, far below 2022’s (projected) 6.4% and 2021’s 7.1%.
Federal Reserve rate decisions: If these projections prove accurate, it would provide fuel to those arguing that the Federal Reserve should ease up on its recent aggressive rate hike schedule. Currently, Kalshi markets project a 70% chance that the Fed will hike 25 basis points at their February 2 meeting, with a 30% chance of a 50 bp hike (a probability that will rise should the inflation print exceed current forecasts). March will likely see another 25 bp increase before the hikes cease. Overall, Kalshi markets project that the federal funds rate will peak at 4.75-5.00% (likely reached after the March meeting), with a 38% probability that the Federal Reserve will cut rates later in the year.
Jobs and GDP: The final piece of the economic puzzle is the strength of the labor market and economy writ large. Kalshi markets project 200,000 jobs (non-farm payroll) will be created in January 2023, and GDP growth in 2023 Q1 to top 2.5%. Despite the strength of those numbers, there are still substantial risk factors: Kalshi markets estimate there is still a 45% chance that 2023 will see at least two consecutive quarters of negative GDP.