As Expected. The August flash core HICP figure came in just a touch softer than expected (NSA level 116.79 vs 116.83 expected). As usual, we wait for the final reading to estimate the movements of the distributions. Having said so, 2023 continues to be marginally worse than 2022 (NSA unchained index of core HICP across years is here), as the soft readings of core goods are more than offset by strong core services (NSA unchained of core goods and core services are here and here, respectively). Having said so, there are finally some good news from national CPIs that should also be reflected in the upcoming HICPs (PPT containing relevant charts for EA is here, and for EA countries is here).
As for monetary policy, a hike in September is possible. With the August report, “acquired core inflation” for 2023 stands at 5.0% (or 4.9% on NSA data), against the latest ECB/NCBs forecast of 5.1% (reminder: “acquired” means what the average YoY would be in December if the level would stop rising today). In other words, the ECB staff forecast is once again “running out of basis points”, as the level of core HICP should stop growing now to meet the ECB/NCBs staff forecast. (please note that we also expect a deceleration going forward, just not as dramatic as implied by the ECB/NCBs staff forecast). At this point, in our view and estimates the ECB staff has to make a choice, given how late it is. It can either (i) admit that the forecast is mechanically too low, revise it up and trigger a hike, or (ii) revise down growth substantially, do not change the inflation forecast and pass the “hot potato” to the NCBs staff as they did back in March. Risk management would clearly call for (i).
Details
A persistent plateau. We estimate that in August core HICP prices grew 38bps MoM (sa) or 4.7% at annual rate (chart of MoM saar here). This brings the 3m/3m (ar) to 5.15% (Figure 1). On a quarterly basis, we estimate that in Q3 core HICP prices will grow at 5.2% at annual rate. The 3m/3m (ar) is finally below the YoY, signaling that the annual variation should start moderating in the coming months. Acquired core HICP inflation for 2023 is 5.0% (or 4.9% on NSA data).
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).
ECB/NCBs staff is, once again, too low. Figure 2 shows history of the MoM (sa) of core HICP, together with our own judgmental forecast and the average consistent with the June ECB/NCBs staff projection. Conditional on our forecast, the YoY is expected to average 5.3% in 2023, 2 tenths above the latest ECB staff forecast (5.1%). In order to meet the ECB staff forecast, core HICP should grow on average 5bps per month going forward, a circumstance which has become quite unrealistic. Conditional on our forecast, the “carry-over effect” for 2024 is 2.1/2.2%.
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.
Medium-term model-based forecast is marginally lower. Today’s data imply a small downward revision to our Q3 core HICP nowcast. As a consequence, the starting point of the model is marginally lower. The model forecast is at 5.1% (Q4/Q4) in 2023 (average of four quarters at 5.3%), 3.7% in 2024, and 3.4% in 2025. We have also revised down a touch our judgmental bottom-up forecast in 2023 to 5.3% (average YoY).
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:Q3 (our nowcast).
Monitoring our medium-term model is informative because it anticipates well the ECB/NCBs forecast. Figure 4 shows the evolution of the 2023 core HICP forecast comparing our “main” model (black line) to the ECB/NCBs staff forecast (blue line). The blue line follows closely the movements of the black line. Therefore, monitoring the evolution of our “main” model is crucial to anticipate the ECB/NCBs staff. As of today, there are (small) upside risks around the 2023 forecast, and larger upside risks around the 2024 forecast (reminder: there is no recession in our assumptions because we follow closely the latest published assumptions of the ECB/NCBs staff).
Figure 4. Comparison of the evolution of the 2023 core HICP forecast.
Note: the figure shows the evolution of the 2023 core HICP forecast (average of the year). The black line shows the evolution of the “main model” presented in Figure 3. The blue line shows the evolution of the ECB/NCBs staff forecast. The x-axis corresponds to the dates of the macroeconomic projection exercises.
Headline HICP: the (small) 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 (small) upside risks around the ECB/NCBs staff forecast, as they both suggest that the average of the YoY could be around 5.7% (as opposed to 5.4% of the latest ECB/NCBs staff forecast).
Implications for the ECB staff and monetary policy
The paradox of being late. In a parallel world where the ECB is ahead of the curve, given the dynamics of (core) inflation and growth, the ECB could make a case for a skip. The paradox of being late is that the room to revise down the inflation forecast is very limited and in our estimate it can happen only if the ECB staff will fold in a large deceleration. It is a close call this time but in the end, we suspect that the ECB will go for a hike in September, especially because it cannot rule out that core inflation will remain above target at the end of the medium-term.