Reply: Not a lot. This level is important to evaluate the relevance conditional inflation forecasts had been, particularly these referring to 2022.
Textual content evaluation and market indicators. First, the geopolitical threat indicator and the financial coverage index:
Determine 1: US Financial Coverage Uncertainty (EPU) Index (blue) and Geopolitical Threat Index (GPR) (tan). Supply: Baker, Bloom and Davis by way of FRED, and GPR indexaccessed 18 October 2022.
Notice that the U.S. EPU – targeted on the US after all, doesn’t point out a lot motion earlier than Biden’s warning to European leaders, nor simply earlier than the Russian “particular army operation”. The GPR Index rose as information of US intelligence warnings to Western intelligence businesses circulated and peaked simply days earlier than the precise invasion.
What about market indicators. The VIX peaked in early December when inventory costs fell, and climbed increased (as US intelligence warnings circulated). However till the autumn of 2021, US monetary markets didn’t understand a excessive threat of Russian aggression affecting inventory markets.
Determine 2: VIX closure (teal). Supply: CBOE by way of FRED.
We all know that any Russian aggression would have had a constructive impression on power costs, each oil and pure fuel. Did the spot markets (bear in mind, as storable commodities, oil and pure fuel ought to replicate each present and anticipated future situations) replicate the anticipated Russian motion?
Right here is Brent and Dutch TTF (pure fuel):
Determine 3: Oil worth (Brent), $/bbl (black). Supply: EIA by way of FRED.
Determine 4: EU pure fuel (Dutch TTF), Eur/MWh (blue), October 2021-October 2022 [NOTE different time scale]. Supply: Tradingeconomics.com, accessed October 18, 2022.
Though there are spikes in each costs, notice that till the beginning of the particular army operation, costs had stabilized within the European pure fuel market.
Oil costs in November had been up, however futures costs indicated a reduction.
Lastly, assuming that an growth of the Russian conflict on Ukraine would increase sanctions, rising sovereign default dangers, we’d have anticipated CDS values to rise prematurely. The worth didn’t enhance earlier than the launch of the particular army operation.
Determine 5: Worth of Russian sovereign debt CDS. Supply: World of presidency bondsaccessed 18 October 2022.
Current worth implies a chance of default of 100% with a restoration charge of 40%.
With out understanding what the costs would have been within the counterfactual of the absence of a Russian particular army operation, one can’t deduce the chances that the markets attributed to the outcome truly achieved. Nonetheless, a excessive chance doesn’t appear to be related by the markets (additionally by textual evaluation).
If inflation outcomes are believed to be pushed primarily by the trajectory of power costs, then inflation forecasts have to be judged by whether or not brokers believed a widespread Russian invasion was possible. Had forecasters, together with these in political circles, assigned a better chance of elevated Russian aggression, inflation forecasts would possible have been increased (and development forecasts correspondingly decrease).
In different phrases, bear in mind the excellence between conditional and unconditional forecasts when evaluating the observe file of inflation forecasts.