Sure to Go Back to 2%?
The April HICP report raises the same questions of the last few months. Our models continue to suggest disinflation going forward. However, reaching (and staying) at target is still a question mark: the distribution of price changes has not moved in recent months. The CI model suggests that the common component is very solid and remains well above target. Finally, the medium-term models deliver a forecast higher than the latest macroeconomic projection exercise (and higher than target). Not only but services HICP (the “trend” of core HICP) are still running at around 4% saar at the margin (see our PDF charts package).
The ECB has signaled a strong appetite for a June cut. At the moment, we remain unsure whether they will cut further in 2024.
A PDF containing all relevant charts for the EA can be downloaded here. A PDF containing all relevant charts for the big 4 countries can be downloaded here.
Evidence from the distributions
The distribution: centered above target. This month, the distribution is little changed compared to the previous month (ridge plot here). Extending the horizon (Figure 1), the distribution shows little changes in recent months and remains centered a bit above target. Finally, the median (Figure 2) has edged down in April but remains very volatile.
Overall, this evidence continues to suggest solid near-term readings above target (MoM saar around 2.5%).
Figure 1. Kernel of HICP excluding food and energy items changes (%, a.r.)
Figure 2. Median of HICP excluding food and energy items prices increase
Evidence from our CI model
Our CI model estimates that net of idiosyncratic shocks, the common component across items is very solid. Figure 3 shows the decomposition of the MoM of core HICP in the “common” component and the “idiosyncratic” component. The model estimates that in April the common component increased by 24bps, in line with the average of the previous months, while the idiosyncratic shock is null (0bps). As we did in previous months, we consider as “true” core the one netting out the idiosyncratic part. Therefore, a rough estimate put the MoM (saar) of “true” core HICP at around 3% in April. The signal of the CI model in the last few months is in line with the distributions and suggests that core HICP is running around 2.5%+ (ar) range at the moment (see Figure 4 below).
Figure 3. Contributions to MoM changes of HICP excluding food and energy items
Note: the Figure shows the decomposition of the MoM percent changes of HICP prices excluding food and energy items. The contributions are estimated using our CI model, a 2-stage OLS-LASSO regression model.
Figure 4. Estimated “Common” component: YoY, 3m/3m a.r. and 6m/6m a.r.
Note: the Figure shows the 3m/3m at annual rate (green line), the 6m/6m at annual rate (red line), and the YoY (blue line) of the “common component” estimated using our CI model.
Implications for the medium-term forecast of core HICP
Medium-term model-based forecast unchanged. Compared to the time of the flash release, the models forecasts are little changed. Using the unemployment rate as measure of “slack”, the forecast is at 2.6% (average YoY) in 2024, 2.3% in 2025, and 2.3% in 2026. Using the output gap (right panel in Figure 5), the forecast is: 2.6% in 2024, 2.2% in 2025, and 2.1% in 2026. The average of these forecasts is still a bit above the latest ECB/NCBs staff forecast.
Figure 5. Model-based medium-term forecast of core HICP (YoY)
Using Urate as a measure of “slack”
Using outputp gap as a measure of “slack”
Note: the confidence intervals (C.I.) are calculated using the estimated parameters distributions.
A comparison with the ECB/NCBs staff forecast
Risks around the ECB/NCBs forecasts are balanced. Table 1 shows a comparison between our latest forecast and the ECB/NCBs staff forecast. Acquired inflation for 2024 is 1.9% (2.3%) in SA (NSA) space. This implies that a forecast a bit below 3% for 2024 is reasonable. Going beyond 2024, the models are a bit above the ECB/NCBs staff forecast, as the inflation process is estimated a bit more persistent. Risks around this forecast are well balanced.
(For a technical note on the concepts of “acquired inflation” and “carryover effect” see here and here).
Table 1. Comparison of forecasts
Note: the “UnderlyingInflation” forecast refers to the average of the two models shown in Figure 5.
Implications for the ECB
Cut in June, then what? Recent communication from governing council members has been clear and there is a strong appetite for a cut in June. Having said that, the data and the models continue to point to high uncertainty going forward. Yes, disinflation is happening but returning (and staying) at target is still a question mark to us. Cut in June, sure. But we cannot be sure of additional cuts in 2024 at the moment.