Uncertainty Continues
A bit softer than expected, accurate forecast for strong services, uncertainty continues. The April flash core HICP report came in a bit weaker than (we) expected (our preview is here) but a bit above consensus. Overall, the downward surprise for us was small and concentrated in core goods. Indeed, our forecast for HICP services (NSA level at 121.2) was spot on. Figure 0 shows our updated MoM forecast errors.
Having said so, the fundamental issue for the ECB is the same: right now, the most likely scenario for the YoY of core HICP is to hit target around July but then rebound and stay a bit above target at the end of the year. Indeed, despite all the talks on the markets (and by the ECB), core HICP in 2024 continues to track closely to its (NSA) path in 2022 and above 2021 (see Figure 1 below).
Communication by the ECB has been clear and the governing council is committed to cut rates in June (possibly a hawkish cut?). However, the problem is what happens after that. At the moment, we remain unsure whether the ECB will be able to cut again in H2.
As usual, we wait for the final reading to assess the distributions.
A PDF containing all relevant charts can be downloaded here.
A PDF containing all relevant charts for the big 4 countries can be downloaded here.
Figure 0. Underlying Inflation MoM forecast errors (on NSA data).
Details
A bit weaker than expected, cannot rule out 2½ percent at the end of the year. We estimate that in April core HICP prices grew 22-24bps MoM (sa) (see here for a comparison across filters). This brings the 3m/3m (ar) to 2.5% (Figure 2). The 3m/3m (ar) is marginally below the YoY, signaling that the annual variation should moderate further in the coming months. However, the 3m/3m is now going sideways (or in moderate acceleration), therefore the 2.5% appears as a reasonable target for the YoY right now going forward. Overall, the issue remains the same of recent months: yes, the EA is disinflating but right now the most likely scenario is for the YoY of core HICP to reach 2% but then rebound up in H2.
Importantly, we invite the reader to notice the persistency of HICP services here.
Figure 1. Core HICP NSA unchained index by year.
Note: the figure shows the evolution of core HICP by year, normalizing the index at 1 on New Year’s Eve.
Figure 2. 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).
2024 acquired inflation at 1.9-2.3%. 2024 forecast a bit below 3%. With the April data, we estimate that acquired inflation for 2024 is 1.9% (2.3%) in core sa (nsa) HICP space. This implies that reaching target (as average YoY) in 2024 is very unlikely, and that a forecast a bit below 3% is more reasonable at the moment.
(For a technical note on the concepts of “acquired inflation” and “carryover effect” see here and here).
Table 1. Forecast comparison, carryover effect, and acquired inflation.
Medium-term model-based forecast is little changed. The models forecasts are little changed compared to the preview. We will keep working on the seasonal adjustment issues and inform you, should anything change. 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, 2.1% in 2025, and 2.1% in 2026. The average of these forecasts is in line with the latest ECB/NCBs staff forecast.
Figure 3. Core HICP: YoY forecast of our “main” Phillips curve model.
Using Urate as a measure of “slack”
Using outputp gap as a measure of “slack”
Note: the figures show the YoY forecast of our “main” Phillips curve model for core HICP price inflation. The confidence intervals are calculated from the estimated parameters distribution.
Implications for the ECB staff and monetary policy
Prudence. Is the Euro area disinflating? Yes. Can core HICP reach and stay at target? Maybe. In fact, as shown above, the most likely scenario at the moment is for the YoY of core HICP to reach 2% around July but then rebound up in H2. The ECB seems committed to cut rates in June. We remain very prudent to conclude that the governing council will be able to deliver further cuts in 2024.