Hard to find a good news. The April flash HICP report was a touch stronger than our expectations (46bps MoM vs 42bps), although the filter revised down marginally recent history (so overall in seasonally adjusted terms it was a small net downward surprise). The big picture is unchanged: we are facing a very persistent process currently centered around 6 percent. In our estimate, there is little signal from the tick down of the YoY because it is due to a base effect. Prices at the margin are still growing above the YoY, which we expect to tick up again in the next 2 months when seasonality will help the hawks. The ECB staff forecast is even more unrealistic than last month, but Lagarde will not have fresh forecasts at the Governing Council. We are patient by nature and we will wait the ECB staff to confess at the June round when the data will force them to revise up (big) their forecast.
To sum up: there is no good news in today’s report, the trend is intact and should remain as such in the near-term.
Details
Very high, persistent process. We estimate that in April core HICP prices grew 46bps MoM (sa) or 5.7% at annual rate with small downward revisions to previous months (chart of MoM saar here). This brings the 3m/3m (ar) to 6.1% (Figure 1). April is the 22nd consecutive month in which the 3m/3m (ar) runs above the YoY (5.6%), suggesting there is room for the YoY to tick up in the coming months. Regarding the YoY, April is the 4th month in which the YoY ticks down since January 2022. As explained yesterday, this contains little signal, especially if the 3m/3m remains above the YoY. On a quarterly basis, we estimate that in Q2 core HICP prices will grow at 5.8% at annual rate. Acquired core HICP inflation for 2023 is 4.3%.
Figure 1. Core HICP metrics.
Note: the figure shows the metrics of core HICP. All figures are seasonally adjusted. “ar”” stands for “annual rate”. The 3m/3m and the 6m/6m are chained (that is, using the US BEA method). The latest point on the chart is April 2023.
ECB staff will be forced to revise up (again) its core HICP forecast. Figure 2 shows history of the MoM (sa) of core HICP, together with our own judgmental forecast and the average consistent with the March ECB staff projection. Conditional on our forecast, the YoY is expected to average 5.5% in 2023, 1pp above the latest ECB staff forecast (4.6%). We estimate that the ECB staff has been upwardly surprised by the incoming data (Mar-Apr) by about 4 tenths (sa). In order to meet the ECB staff forecast, core HICP should grow on average of 10bps per month going forward, a circumstance which is completely unrealistic. Unfortunately, we will need to wait until June for the staff to submit a new forecast. In the meanwhile, the Governing Council might take signal from the downward tick of the YoY, just to be upwardly surprised again in the next two months.
Finally, under our own forecast (blue line in Figure 2), acquired inflation for 2024 is 2.1%, which makes the ECB staff forecast unrealistic not only for 2023 but also for 2024. A more realistic forecast for 2024 at this point is already above 3% (as opposed to the 2.5% of the ECB staff forecast).
Figure 2. Core HICP MoM (sa).
Note: the figure shows the MoM (sa, not annual rate) of core HICP prices. The blue line shows history and our own forecast. The red-dashed line shows the forecast consistent with the latest ECB staff macroeconomic projections.
A note on the YoY and seasonality: hawks might be helped by seasonality in the next 2-3 months. As explained yesterday, we recommend to take little signal from any single print and keep looking at the big picture. Therefore, the fact that today the YoY ticked down contains no signal for us and we do expect it to tick up again in the coming two months (to 5.7%-5.8%). Not only, but while the seasonality helped the doves in the last two months, it is likely to help the hawks going forward. This will happen because the NSA level of core HICP is expected to go sideways in May-July. But in the current environment even a small increase would be interpreted by the filters as an upward surprise and could trigger a revision of recent history. As easy as it might sound, we first need the NSA level to deviate from the current trend to take some signal. We are not there.
Medium-term model-based forecast little changed. The inclusion of Q2 in-sample did not trigger significant revisions to our EA “main” Phillips curve model forecast as our nowcast is nearly identical to what the model expected. The forecast is at 5.3% (Q4/Q4) in 2023 (average of four quarters at 5.4%), 3.7% in 2024, and 3.5% in 2025. The confidence bands (calculated from the estimated parameters distributions) suggest that the risks are skewed to the upside.
Figure 3. Core HICP: YoY forecast of our “main” Phillips curve model.
Note: the figure shows the YoY forecast of our “main” Phillips curve model for core HICP price inflation. The confidence intervals are calculated from the estimated parameters distribution. Last quarter in-sample is 2023:Q2 (our nowcast).
Headline HICP: the risks are to the upside. For brevity, we do not show our judgmental and model-based forecast for headline HICP. The bottom line is that they point to upside risks around the ECB staff forecast, as they both suggest that the average of the YoY could be around 6.4% (as opposed to 5.3% of the latest ECB staff forecast).
Implications for the ECB staff and monetary policy. What we are witnessing in the Euro area seems a replay of what happened in the US. There are clear differences, of course. But there is something in common: the ECB staff is late and continues to be surprised by the incoming data (of core inflation) to the upside. In the next few months, headline inflation will moderate due to base effects and lower energy prices. But the real game is with core inflation, expectations, and wages. Right now, the ECB is losing. Time to wake up and follow the Fed.
(This last paragraph is a copy/paste from last 4 months and we suspect it will remain unrevised for a few months going forward)