Lessons learned from one of Kalshi’s top markets
Introduction: In this series, the Kalshi contracts team analyzes past interesting markets. This time, Will and Xavier look into the fall and rise of CPI-21OCT-T0.5, a market centered on the divisive and universally relevant topic of inflation.
After a year of tumultuous supply chain shocks, trillion dollar stimulus packages and an economy itching to roar back after last year’s COVID-19 disruptions, economic forecasters were busy attempting to forecast the trajectory of the Consumer Price Index, one of the most commonly used metrics to measure inflation. This particular market (CPI-21OCT-T0.5) asked if the CPI would rise by more than 0.5% in the month of October, data for which was released at 8:30 AM on the morning of November 10.
The market was launched immediately following the release of July’s data, which put economy-wide inflation at 0.5%, a major decrease from June’s 0.9%. While there are many determinants of inflation, many news commentators had divided into two camps: hyper-inflationists like Twitter CEO Jack Dorsey who worried that fiscal profligacy and aggressive Federal Reserve policy-making would transform inflation into a self-fulfilling prophecy (whereby businesses raise prices in expectation of future inflation, thus causing even more inflation) and “transitory”-ists like Federal Reserve Chairman Jerome Powell who believed that inflation would subside as supply chains adjusted to the new increase in demand.
Despite these arguments, the market opened around 50%, before settling down to roughly 30% as early indicators (such as used car prices) suggested that inflation was likely to abate. Prices fell even further as August numbers fell to 0.3%. But as supply chain struggles continued and leading indicators continued to rise, market prices inched back up until it settled around 50/50 at the end of the contract’s lifespan. When all the dust had settled, the value came in at 0.9%, well above market expectations.
Key takeaways
What are some of the key takeaways?
Look at the leading indicators. The market reacted swiftly not just to releases of the major data (such as previous month’s inflation data) but also important leading indicators, such as focusing on core CPI (which is CPI excluding food and energy, and is historically more accurate at forecasting future inflation than headline CPI).
Ignore the noise. People on Twitter and TV were blowing up the airwaves with confident prognostications that inflation was going to going into hyper-drive or that inflation was merely a psy-op and would swiftly decline into irrelevance. But smart market participants cut through the malarkey and made reasoned bets based on the data.