Can the ECB Ignore the Evidence?
Services, “acquired” inflation remain an issue for the ECB. Can they ignore it? Since the beginning of the year, we have been delivering a message: we are not sure that core HICP can reach and stay at target because there is no sign of deceleration in HICP services. Today’s reading (just a touch above our expectation) is another confirmation of our thesis (see Figure 0). At this point, the dominant narrative (“it is only because Easter was early this year”, “it is only because of package holidays”, “it is only because of the Olympics”) is ignoring the data. “Acquired inflation” for 2024 implies there is no room for the ECB/NCB staff to revise down the forecast. Indeed, all risks are to the upside. Finally, our medium-term model-based forecast is little changed and remains above the ECB/NCB forecast.
ECB seems committed to cut rates in September. Can they ignore the evidence?
As usual, we wait for the final reading to assess the distributions.
Figure 0. HICP Services – NSA (unchained) index by year
Details
YoY at 2½+ percent at the end of the year. We estimate that in August core HICP prices grew 24bps MoM (sa) (here a comparison across filters). This brings the 3m/3m (ar) to 3.3%, in acceleration (Figure 2). The 3m/3m (ar) is now above the YoY. The most likely scenario is for the YoY of core HICP to remain above target going forward and be at 2.5%+ in December.
Figure 1. Core HICP NSA unchained index by year (index normalized to 1 on each New Year’s Eve).
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 2.7-2.8%. This is now a problem for the ECB. With the August data, we estimate that acquired inflation for 2024 is 2.7% (2.8%) in core SA (NSA) HICP space. This implies that the there is no room for the ECB/NCBs staff forecast to be revised down going forward. If anything, the risks are to the upside.
(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 unrevised. The models forecasts are unrevised compared to the preview, as the tiny surprise did not change the quarterly nowcast. Using the unemployment rate as measure of “slack”, the forecast is at 2.9% (average YoY) in 2024, 2.6% in 2025, and 2.4% in 2026. Using the output gap, the forecast is: 2.9% in 2024, 2.5% in 2025, and 2.3% in 2026. The average of these forecasts is above 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.