Aahan Menon, founder of the systematic macro shop Prometheus Research, takes Jack Forehand through four charts on the Last Call monthly wrap: how broad the current inflation is, how much of it is demand rather than supply, why the cooler prints of the past two months do not change the trend, and the single rule his firm uses to decide whether to own Treasuries at all.
👤 Guest: Aahan Menon, founder of Prometheus Research
🎙️ Host: Jack Forehand
📰 Published: 30 August 2026
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Key Takeaways
The problem is breadth, not the headline number
"you have about 70 to 80% of PCE components now above that 2% target"
Broad inflation is the kind that persists
Demand inflation is slow and sticky; supply inflation is fast and mean-reverting
"Supply based inflations on the other hand over a 6 to 12 month period tend to be very fast but mean reverting"
Demand alone is enough to keep inflation above the Fed's target
Strip out the supply effects coming from the Iran situation and inflation is still materially above 2%
The supply shock is concentrated in gasoline and energy goods
Across the other components of PCE, the demand contribution dominates
The cooler prints of the past two months are entirely the supply side
A deflationary June and a 16 basis point rise in July, with the demand trend unchanged underneath
The hawks inside the Fed are looking at the same decomposition
"a lot of nominal demand in the economy right now" on top of a supply shock
Oil shocks reach core inflation, and the Fed ends up hiking regardless
"persistent oil price shocks always tend to result in more core inflation over time"
One rule decides whether to own Treasuries: is the nowcast above 2%
"If our inflation nowcast is above 2% we avoid owning bonds. If it is below 2% we own bonds."
The nowcast is running in the fours, and has averaged between 3 and 4% this year
Everyone Has a Measure That Agrees With Them
Forehand opened on how contested the subject has become, inside the Fed as well as outside it. Menon agreed: "it's always a very polarizing subject", covering whether inflation is going to persist, whether it is being measured correctly, and the conspiracy theories that attach to both.
Forehand's version of the problem: "whenever anybody has a different opinion they'll find a measure somewhere" — the real-time trackers, PCE, CPI, whichever one supports the view
What he said is unusual about Menon's work is that it goes underneath the headline series to the breadth of the increases, which is not something most commentary looks at
The Problem Is How Broad the Inflation Is, Not How High
Menon started from the point everyone already accepts: CPI is elevated, PCE is elevated, and both stay elevated across whatever look-back window is applied — a year, six months, three months, three-month averages.
The part he says matters more: "It's not just the headline number. It's the fact that all of the components under the headline number which go into the headline number are currently extremely elevated and elevated in a way where they're inconsistent with the Fed's policy target."
The chart pairs a fast-moving measure of PCE inflation — a three-month annualized number — against the breadth of that measure, meaning how many components are moving
The adjustment he made to the breadth measure: rather than counting components that are rising or falling, he counted whether they are "above 2% or below 2% rather than just rising or falling", which puts the measure against the policy target instead of against last month
"if we average out the last few months, basically you have about 70 to 80% of PCE components now above that 2% target"
Why breadth is the forward-looking part: "when you have those types of dynamics where you have a persistently high level of inflation on a broad basis, you usually tend to have much more consistent inflation when you're looking forward"
Forehand summarized the implication in his own words: this says far more about future inflation than a print driven by one thing, such as oil.
Demand Inflation Is Slow and Sticky, Supply Inflation Is Fast and Reverts
Menon's second chart splits the same inflation into its two possible sources. Inflation is nominal demand set against the existing supply, so it is either demand-based or supply-based, and his firm has built a quantitative measure of each that can be run back through history.
The finding for today: "the demand-based drivers of inflation are basically enough on a standalone basis to keep us above the Fed's target"
Why the distinction decides how long this lasts: "demand-based inflations tend to be slow and persistent. Supply based inflations on the other hand over a 6 to 12 month period tend to be very fast but mean reverting"
When demand-based inflation is also spread across every component, "you get an inflation that's what most people would call sticky"
Forehand read the demand-versus-supply split off the bottom of the chart and put it to him that the vast majority of current inflation is demand-driven. Menon confirmed it and gave the counterfactual: "even if we were to strip out all the supply based effects which are really coming out of the Iran situation, we would still have inflation that's materially removed from the Fed's policy target of 2%."
The Supply Shock Is Gasoline and Energy Goods, and the Rest of the Chart Is Blue
The third chart breaks the same decomposition down by the major components of PCE rather than reporting it at the headline level.
The one place the supply shock actually sits: "the biggest area of supply shock based inflation is gasoline and energy goods today"
Take out most of gasoline and energy goods and what remains is a demand force driving inflation across the other categories
Demand contributions are plotted in blue and supply contributions in red, and, in his summary of the picture, "there's a lot more blue than there is red"
The Cooler Prints Are the Supply Side, and the Demand Trend Is Untouched
The fourth chart is the one Menon called the most telling. The last few prints have fed a story that inflation is rolling over, and he said the decomposition shows where that reading comes from.
What the reported data shows: "we basically had a deflationary June and then we had a about a 16 basis point rise in July, which relative to what we had earlier in the year, pretty meager"
What the decomposition shows underneath it: "virtually all of the declines that have happened in inflation or the slowing in inflation is driven by these supply based effects"
"when you look at the underlying demand-based trend, it's still very very much intact", which he said points to continued inflationary pressure from demand over the next few months
The Hawks Inside the Fed Are Looking at the Same Thing
Forehand said a Fed governor had come out that day calling for a hike, and asked whether this is what those officials are seeing behind the headline data. Menon said it largely is, with the caveat that opinion inside the Fed runs both ways and some of it still treats the episode as transitory.
A number of Fed governors look at this type of work, and the Fed does similar work itself, with methodological differences in how it is approached
The intuition he says is straightforward: "there's a lot of nominal demand in the economy right now and given that we have a supply shock on top of a nominally hot economy we basically have everything required for persistent inflationary pressures"
Even If It Is All an Oil Shock, the Fed Still Ends Up Hiking
Menon then argued the case against himself. Assume the demand-versus-supply work is wrong and this is purely an oil shock. He said that position is hard to square with the historical record.
"persistent oil price shocks always tend to result in more core inflation over time", and as they do, pressure builds on the Fed to raise policy rates
The mechanism is a supply shock lifting oil or commodity prices, which works its way up the supply chain and into core inflation
"In the interim between those two things, the Fed usually inevitably has to end up hiking monetary policy."
He said the past six months of commodity price moves will have an effect on monetary policy whether or not anyone accepts the demand argument
One Rule for Treasuries: If the Nowcast Is Above 2%, Don't Own Bonds
Forehand, a quant by background, said he keeps building complicated models and going back to the simple one, and asked about the Treasury model. Menon said his firm released it in March, at the onset of the war, when oil prices were spiking and the debate was whether high oil would destroy demand and bid Treasuries or feed inflation and hurt them.
The premise: inflation is a pressure on bonds because it is a pressure on policymakers to raise rates
The whole rule: "If our inflation nowcast is above 2% we avoid owning bonds. If it is below 2% we own bonds." The nowcast is daily
"we tested that over the period from I think 2000 to present", and "you can actually get the majority of bond returns just by following that approach"
Where the signal stands now: "today our inflation nowcast is actually running in the fours and has basically averaged the between 3 and 4% over the course of this year and has basically indicated that you need to avoid bonds"
Forehand said this matches his own experience of trend following — simple models tend to beat buy and hold, or at least beat it substantially on a risk-adjusted basis. Menon added that the signal is also useful to investors who cannot go to zero in a position: "if you're in a really good environment for bonds, maybe you want to overweight your bonds if you're not somebody that can just completely exit the bonds."
Menon's bottom line is that the inflation now running is the persistent kind — broad, demand-driven and unrelieved by the two cooler prints — and that until the daily nowcast comes back below 2%, the systematic answer on Treasuries is to stay out.
Products, Companies & Tools Mentioned
The Federal Reserve (Its 2% target is the benchmark every measure in the segment is set against; Forehand notes a governor calling for a hike that same day, and Menon says a number of them look at this kind of decomposition)
PCE and CPI (The headline series both men say are elevated on every look-back window, and which the breadth and demand-supply work is built underneath)
US Treasuries (The asset the simple rule switches on and off; the nowcast is above 2%, so the model is out of bonds)
Menon's daily inflation nowcast (Running in the fours, and averaging between 3 and 4% this year)
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