Societe Generale’s analysts use their Brent, West Texas Intermediate (WTI) and Diesel price forecasts to derive forward-looking inflation surprises for the US and Eurozone. By linking spreads, inventories and refining cracks, they construct 12‑month crude and Diesel paths and show that, if these are accurate, Consumer Price Index (CPI) surprises can be estimated well ahead of official releases using an energy-centric framework.

Using oil paths to project CPI

“Since most inflation surprises (measured as the gap between realised inflation and one year-ahead forecasts) can largely be attributed to fluctuations in oil prices, we can derive a forecast for inflation surprises using our own oil price outlook. Based on the scenarios presented in our latest outlook, we construct crude oil and diesel price paths for the next 12 months.”

“The key idea is straightforward: if the oil price forecast is sufficiently accurate, it becomes possible to estimate CPI surprises well in advance, without having to wait for the actual inflation releases.”

“We forecast Brent using a proprietary model that links spreads and inventories. We then derive a WTI price forecast by assuming an average $5/bbl discount to Brent. A discerning reader may challenge this “fixed” spread, but it simplifies the exercise for our purposes.”

“We then examine recent trends in refining cracks to derive a diesel price forecast. Again, this relies on the simplifying assumption of a stable relationship between product prices and crude oil prices, which readers are free to challenge and adjust based on their own views.”

“The next CPI release is expected on 14 October. According to our model, inflation should surprise modestly to the upside, coming in just below a 2-percentage point surprise relative to one-year-ahead expectations.”