Iran. Tariffs. Oil. — A walkthrough of the InflationTransformer model, 12 macro scenarios, and risk probabilities for April 2026. Runtime ~8 min.
CPI inflation currently stands at approximately 2.2% YoY (April 2026), down from a peak of ~9% in mid-2022. Our proprietary transformer-based model projects that under a no-new-shock baseline, headline CPI will remain near 2.7–2.8% through April 2027 — above the Fed's 2% target but well within a manageable range.
The critical risk to this baseline is policy-driven supply shocks. Even moderate tariff escalation raises the 12-month CPI median to 5.0% with a 50% probability of exceeding 5%. A broad stagflation scenario (combined supply, wage, and energy shocks) produces an 8.6% median at M+12 — re-entering 2022 crisis territory. Only a severe demand contraction returns CPI below the 2% threshold.
This report is produced by InflationTransformer, a probabilistic deep learning model trained on 26 years of monthly U.S. macroeconomic data (1998–2024). The model produces a full probability distribution — not a single point forecast — for CPI over a 12-month horizon, conditioned on user-specified macro scenarios.
312 monthly observations, 1998–2024. 15 macro variables sourced from FRED and Yahoo Finance. Covers 3 Fed tightening cycles, GFC, COVID spike, and 2021–2022 re-acceleration.
Multi-scale patch transformer with Gaussian Mixture output (3 components). Takes 48 months of history as input; produces 12-month probabilistic forecast simultaneously. Oil/energy scenario is injected as a conditioning signal.
12 pre-defined macro scenarios covering oil price paths, trade policy shocks, stagflation, demand contraction, and commodity supercycles. Each scenario applies shocks to multiple variables and runs 500 Monte Carlo draws to estimate full distributions.
Literature-calibrated pass-through multipliers applied post-model: Oil (×0.05), PPI (×0.10), Import Prices (×0.08), Wages (×0.20). Ensures macroeconomic credibility of scenario paths beyond what training data alone covers.
CPI headline & core, PCE, Oil WTI, PPI, Import Prices, Wages (ATW/ECI), M2 money supply, 10Y–2Y yield spread, USD index, University of Michigan expectations, Leading Indicators, Fed Funds Rate.
Rolling 1-step-ahead backtest on 2021–2026 data (never seen in training). OOS RMSE: 3.1pp full period (dominated by COVID spike); post-peak RMSE ~0.6pp. 80% prediction intervals cover 79% of actual observations — well-calibrated.
The model was trained on data through approximately September 2023. The 2021–2026 period was entirely held out as an out-of-sample test. This includes the full COVID inflation spike — the most severe inflationary episode in 40 years — giving a rigorous stress test of the model's predictive capability.
RMSE consistent with published academic benchmarks for monthly CPI forecasting. 80% prediction interval coverage close to nominal — the model is not overconfident.
RMSE of 3.1pp reflects the 2022 spike — an unprecedented event. Post-peak (2023 onward): RMSE ~0.6pp, comparable to best-in-class econometric models. The model tracked the disinflation path accurately.
The chart below shows all 15 variables the model ingests, plotted from 1990 through April 2026. The green dotted line marks the Fed's 2% inflation target. The red dotted vertical marks the June 2022 peak. The shaded region is the post-2020 out-of-sample period — data the model never saw during training.
plots/feature_trends.png — all 15 model inputs. Click to zoom.
CPI headline, core, and PCE all show the same 2022 spike and subsequent disinflation. All three are now hovering just above the 2% target — confirming the "slow lane" baseline.
Oil YoY and its 1-, 3-, and 6-month lags are included separately — because oil shocks take different amounts of time to pass through to consumer prices. The model learns the timing automatically.
Fed Funds, yield spread, TIPS breakeven, UMich expectations, wages, and unemployment give the model visibility into tightening cycles, labour market pressure, and forward-looking inflation expectations.
Not all inflation is the same. The chart below breaks down what inflation is made of, which parts are sticky vs flexible, and whether people's expectations are anchored — three questions that directly determine how long an inflation episode lasts.
CPI Headline — everything: food, energy, shelter, goods, services. Volatile but complete.
CPI Core — strips out food and energy. Less volatile, better signal of underlying trend. The gap between headline and core tells you how much of inflation is driven by oil and food prices.
PCE Core — the Fed's preferred measure. Uses different weights than CPI (lower shelter weight, higher healthcare weight) and tends to run ~0.3pp below CPI Core. When the Fed says "2% target," they mean PCE.
The stacked bar chart shows the approximate contribution of each component to headline CPI since 2018. The 2021–2022 surge was a simultaneous shock across all four components: energy (red), food (gold), goods (purple), and shelter (orange) all spiked together — a once-in-40-year co-movement.
The decline from 9.1% to 2.2% was led by energy going negative, goods deflating, and food normalising. Shelter has been the last holdout — still above 4% as of early 2026 — which explains why core is still above headline's "feel."
Core goods deflate quickly when supply chains normalise — we saw this in 2023. Energy is volatile but mean-reverts.
Shelter (rent + owner-equivalent rent) is the stickiest component — it has a 12–18 month lag from actual market rents to CPI measurement. This is why the Fed watches it closely: once shelter inflation gets embedded, it takes 1–2 years to wash out even after market rents stabilise. As of April 2026, shelter is still the primary reason inflation hasn't fully reached 2%.
The University of Michigan 1-year inflation expectation is a leading indicator. When consumers expect prices to rise, they demand higher wages and accept higher prices — making inflation self-fulfilling.
The critical period was 2021–2022: expectations spiked to ~5% but never de-anchored into a persistent wage-price spiral — largely due to Fed credibility. Currently expectations sit at ~3.4% — above actual CPI. If expectations rise further, it becomes a model input for our stagflation scenario.
Headline CPI has declined from its 9.1% peak (June 2022) to approximately 2.2% as of April 2026. The disinflationary trajectory has been broadly in line with model projections. Key macro conditions informing the current forecast:
CPI YoY trending down from 2.7% (Nov 2024) to 2.2% (Apr 2026). The pace of disinflation has slowed — suggesting proximity to a floor near 2–2.5% absent new shocks.
WTI oil flat-to-slightly-declining in 2025–2026. No major commodity supercycle underway. This is the key reason the baseline forecast is benign.
Primary upside risk is tariff escalation. Import price pressure has structural lag of 6–9 months to pass through to headline CPI, making M+6 to M+12 the most sensitive window.
The scenario engine projects CPI through April 2027 under 12 distinct macro environments. All scenarios share the same starting point (April 2026, ~2.2%) and diverge based on the shocks applied. The structural overlay ensures pass-through is calibrated to historical multipliers rather than relying solely on what the model saw in training.
The small multiples chart shows every scenario as its own panel — same y-axis scale, same time axis — so you can compare the shape and speed of each inflationary path at a glance. Scenarios that spike early (oil shocks) look different from scenarios that ramp slowly (tariff pass-through) or fall monotonically (demand slump).
| Scenario | Description | M+12 CPI | vs. Baseline | Risk Tier |
|---|---|---|---|---|
| Stagflation | Oil +30%, PPI +20%, Wages +10%, Import +15% | 8.6% | +5.9pp | EXTREME |
| Commodity Supercycle | Broad commodity surge across energy + metals | 6.5% | +3.7pp | EXTREME |
| Tariff — Severe | Import +25%, PPI +15% (full escalation) | 6.2% | +3.5pp | EXTREME |
| Tariff — Moderate | Import +15%, PPI +8% (partial escalation) | 5.0% | +2.3pp | HIGH |
| Tariff — Light | Import +8%, PPI +4% (limited pass-through) | 3.9% | +1.2pp | HIGH |
| Oil +20% | WTI oil rises 20% YoY over forecast horizon | 3.7% | +1.0pp | ELEVATED |
| Oil Flat (Baseline) | No new shocks — status quo macro environment | 2.74% | — | MODERATE |
| Oil −10% | WTI oil falls 10% YoY (easing energy costs) | 2.2% | −0.6pp | MODERATE |
| Demand Slump | Sharp demand contraction, spending & imports fall | 0.3% | −2.4pp | LOW |
The distribution snapshot chart shows the full probability range for each scenario at four specific dates — not just the median. Wider bars indicate greater model uncertainty; bars that overlap mean those scenarios are indistinguishable at that horizon.
This section answers the question most relevant for portfolio risk management: given a scenario, what is the probability that CPI exceeds a threshold that would force a Fed policy response?
| Scenario | P(CPI>2%) | P(CPI>3%) | P(CPI>4%) | P(CPI>5%) | Tier |
|---|---|---|---|---|---|
| Stagflation | 90% | 90% | 90% | 90% | EXTREME |
| Commodity Supercycle | 90% | 90% | 90% | 85% | EXTREME |
| Tariff — Severe | 90% | 90% | 90% | 82% | EXTREME |
| Tariff — Moderate | 90% | 90% | 78% | 50% | HIGH |
| Tariff — Light | 90% | 77% | 47% | 25% | HIGH |
| Oil +20% | 90% | 72% | 44% | 21% | ELEVATED |
| Oil Flat (Baseline) | 73% | 43% | 21% | 10% | MODERATE |
| Oil −10% | 55% | 32% | 14% | 10% | MODERATE |
| Demand Slump | 15% | 10% | 10% | 10% | LOW |
oil_flat) shows
43% probability of CPI remaining above 3% at M+12. The model is signalling
that current momentum alone — without any new policy shock — is sufficient to keep inflation
persistently above the Fed's target in nearly half of simulated paths.
Every additional "tranche" of tariff escalation adds approximately +1.1pp to the M+12 CPI median. The tariff pass-through channel (import prices → producer prices → consumer prices) has a structural 6–9 month lag, making it invisible in near-term data but highly predictable at the 12-month horizon. Once tariffs are in place, the inflationary effect cannot be reversed quickly — the model shows pass-through continuing to compound through M+12.
At M+3, the stagflation scenario (3.6%) looks only modestly worse than tariff_severe (3.2%). But by M+12 the gap has grown to 2.4pp (8.6% vs 6.2%). The wage-price feedback loop only compounds after month 6. Positions hedging against stagflation need to be in place before M+6 — not after the first signs appear in the data.
A broad commodity boom (oil + metals + agricultural) ultimately produces higher inflation than trade tariffs alone — 6.5% vs 6.2% at M+12. Tariff shocks are concentrated in import price channels; commodity supercycles hit energy, food, industrial inputs, and transport simultaneously, creating broader and more persistent pass-through.
Of all 12 scenarios, only oil_down_10pct (2.2%) and demand_slump
(0.3%) project CPI near or below the Fed's 2% target. Passive macro policy will not be
sufficient — returning to target requires either a sustained energy price decline or a
significant demand contraction. The model assigns near-zero probability to spontaneous
disinflation under current conditions.
Assume a conservative scenario mix: 50% baseline, 25% tariff_moderate, 15% oil_up_20pct, 10% demand_slump. The probability-weighted P(CPI>4%) = 0.50×21% + 0.25×78% + 0.15×44% + 0.10×10% = 37%. Over one-third probability of a Fed-mandating overshoot before any above-baseline scenario is even assumed likely. At 40% tariff_moderate weight, this rises to ~44%.
At M+3 (July 2026), the spread across scenarios is only 1.2pp. Investors attempting to read incoming CPI prints through Q2–Q3 2026 as confirmation of a scenario will find the signal too weak to act on. The model suggests positioning based on scenario probabilities (policy signals, trade flow data, wage surveys) rather than waiting for CPI data to confirm — by which time the M+12 outcome is already largely determined.
The table below illustrates a plausible scenario probability assignment and the resulting risk-weighted CPI distribution at M+12. This is not a point forecast — it is a weighted average of conditional distributions based on assumed scenario likelihoods. The CIO should substitute their own probability assignments.
| Scenario | Scenario Weight |
M+12 Median |
Weighted Contribution |
P(CPI>4%) Contribution |
|---|---|---|---|---|
| Oil Flat (Baseline) | 40% | 2.74% | 1.10pp | 8.4% |
| Tariff — Moderate | 25% | 5.00% | 1.25pp | 19.5% |
| Oil +20% | 15% | 3.74% | 0.56pp | 6.6% |
| Tariff — Light | 10% | 3.88% | 0.39pp | 4.7% |
| Demand Slump | 10% | 0.27% | 0.03pp | 1.0% |
| Risk-Weighted Total | 100% | 3.33% | 3.33pp | 40.2% |
Cyclical inflation dynamics, pass-through from oil/commodities, tariff and import price channels, disinflation paths following demand normalization. All channels well-represented in training data (1998–2024).
Fiscal dominance (large deficit monetisation), geopolitical supply disruptions (wars, sanctions), structural breaks in wage formation, financial crises with non-linear credit effects. Scenarios outside the training distribution will be under-estimated.
The model does not assign probabilities to scenarios — that is the user's judgment call. The model only provides P(CPI outcome | scenario). Scenario weights should reflect the team's macro view.
Model should be retrained quarterly or when macro regime signals a structural break (e.g., sustained CPI deviation >1pp from model for 3+ consecutive months). Current checkpoint: trained through Sep 2023, with live data inference through Apr 2026.