Weekly Forecasts 5/2026
The worst-case scenario for Israel and deceleration of U.S inflation
Contents:
A worst-case scenario for Israel in the Iran-Israel conflict (with Patricia Marins).
Where are we with U.S. inflation?
Forecasts for U.S. inflation indicate a deceleration after a short spurt at the start of the year.
We have not been updating our U.S. inflation forecasts for a while. The last time we forecasted U.S. inflation was at the end of September, when Mate ran VAR-GARGH estimations and forecasts on the U.S. Consumer Price Index (CPI) and core inflation series. There are multiple reasons why we have not provided inflation forecasts after that, some of which I will detail below, but the main thing to note is that our September forecasts were rather accurate. They, for example, correctly anticipated the fall of month-over-month change in the U.S. CPI to the negative at the end of the past year.
The problem we have had with forecasting the inflation series, and one of the reasons why we stopped forecasting them for a while, was the unclarity regarding the time series properties of the U.S. consumer price index series. While testing the CPI, the core inflation, and the ‘super-core inflation,’ the problem re-emerged in the test, indicating that the series would be I(1) nonstationary processes, as an assumption we had disregarded previously.
To make a clear judgement of what forecasting method would be more suitable, this week we will present forecasts based on the (assumed) cointegration relationship between the variables. Next week, we’ll update the inflation forecasts from VAR-GARCH modeling. This is done to see which performs the best.
In the geopolitical section, we present a worst-case scenario for Israel in a conflict with Iran. This piece is co-written with Patricia Marins, a Brazil-based geopolitical analyst whom I’ve been following on X for over six months. She’s simply brilliant, and we are investigating venues to expand our cooperation. In the worst-case scenario, Iran will strike the nuclear facility near Dimona, leading to massive retaliation from Israel, igniting a global conflict. Let’s start with it.
Tuomas
The worst-case scenario for Israel in conflict with Iran
Co-written with Patricia Marins.
The worst scenario for Israel would be a large Iranian missile striking the Shimon Peres Negev Nuclear Research Center near the city of Dimona, or the ‘Dimona reactor.’ A successful attack with a missile like the Fattah, breaching the reactor core or fuel storage pools, would not only destroy the containment but also vaporize and fragment the nuclear core. The massive kinetic energy would create a rapidly rising column of heated debris and smoke. This would inject radioactive particles into the atmosphere, rendering entire Israeli cities uninhabitable for decades. If precipitation occurred shortly after the attack, the radiation would be “washed” from the atmosphere and deposited on the ground in concentrated form, making agricultural lands and water reservoirs unusable. This would prompt Israel to respond with nuclear weapons as well, devastating many of Iran’s cities.
At this point, both Russian and U.S. commitment would be weighted and, in the worst-case, Russia would enact a retaliatory strike to Israel with nuclear weapons, basically destroying the country. If the U.S. were to retaliate against Iran or Russia, a global nuclear war would erupt. Essentially, the developments would follow the last three steps of the 10-point worst-case scenario Tuomas envisaged for the war between Israel and Iran.
The key issue here is that Iran has been verified to possess more than 400 kg of uranium enriched to 60%, meaning it is mere weeks away from having enough material for a weapon. In fact, six months ago, Iran already had this material and possesses at least four dual-capable missiles with the range to reach Israel: Emad, Ghadr, Sejjil, Khorramshahr, and their various variants. We have also speculated on the possibility of whether Iran already holds a nuclear weapon. In October 2024, we reported on the strange seismic activity in the Kavir desert, or Dasht-e Kavir (the Great Salt Desert), whose shock waves some researchers attributed to a major (nuclear) explosion. In October, Tuomas wrote about resurfaced speculation that Iran would have purchased nuclear warheads from defunct Muslim states of the Soviet Union in the 1990s. In other words, at the very minimum, Iran can already be considered an ambiguous nuclear power and, in the worst-case, an actual nuclear power. These imply that there could even be an Iranian nuclear response, causing immense devastation that would extend to neighboring countries.
Outside the nuclear realm, the worst scenario would be Iran taking the initiative and launching a barrage of 500 missiles against Israel or using her anti-ship missiles to sink the USS Abraham Lincoln. The former would be a devastating scenario for Israel. Broadly speaking, data from the American fleet and THAAD systems show poor interception rates during the 12-day war. Imagine then that more than 400 missiles with warheads over 1 ton hit cities like Tel Aviv. A barrage of this size would not be a problem for Iran. About a year ago, intelligence services estimated that Iran operated 600 missile cities, with most of them operating multiple silos. This would lead the US to intervene and, together with Israel, attack Iran with all the might they possess. The latter would naturally be a huge embarrassment to the U.S., threatening the façade of U.S. military might. As Tuomas noted in “Inching Towards the Doomsday,” only a massive retaliation with nuclear weapons would be sufficient to restore the situation.
Where we are now is that Iran has signaled multiple times, even with the mouth of Supreme Leader Ali Khamenei, that Iran will consider all U.S.-Israel attacks as existential threats and that it will respond accordingly. While we do consider it unlikely that the IRGC (Islamic Revolutionary Guard Corps) would target the ‘Dimona reactor’ or USS Abraham Lincoln in the early stages of a re-emerged conflict, we need to acknowledge that Iran holds this power. Understanding this, we now wait for what comes out the negotiations, which started today in Muscat (Oman).
Where are we with U.S. inflation?
Due to the government shutdown, there was no publication of the inflation indices in the U.S. in October. We approximated the October numbers by averaging over the September and November numbers, i.e., we calculated an average of those two to come up with an estimate for the October inflation figures. What most seem to have missed is that U.S. inflation fell from September to November.
