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As Expected
As expected. The December flash core HICP figure came in exactly as we expected: NSA level 117.13 vs 117.158 expected by us. The YoY of core HICP came in at 3.42% vs 3.44% expected by us. The estimated SA MoM of core HICP is also in line with our expectations (see below for details). Headline HICP was a touch softer: NSA level 124.04 vs 124.124 expected by us. As usual, we wait for the final release and the distributions for a full analysis. Overall, today’s report confirms the impression that disinflation is on its way. Having said that, it remains unclear whether core HICP can reach target or remain a bit above it (for instance, the unchained NSA level of services HICP continues to be less friendly than other signals – see here). In this sense, the first few months of 2024 should bring clarity because, as discussed in the past, most repricing happens in Jan-Apr.
ECB can be happy about today’s report. The December report confirms the latest ECB/NCBs staff forecasts. Our model-based medium-term forecast is unchanged and continues to be in line with the ECB/NCBs projections. At the moment, there is no reason to think the ECB/NCBs staff will make substantial changes to the forecast at the March round (note: this can change with the January report when Q1 will be added in-sample – we will circulate some simulations in the coming weeks).
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.
Details
As expected, running around 2½ percent at annual rate. We estimate that in December core HICP prices grew 20bps MoM (sa) or 2.4% at annual rate (see here and Figure 1). This brings the 3m/3m (ar) to 1.9% (Figure 2). The 3m/3m (ar) is well below the YoY, signaling that the annual variation should moderate further in the coming months. As mentioned in our HICP preview, the seasonal adjustment of the December data is tricky, as some filters show large MoM saar (around 3.5%) with negative revisions in November. In any case, under reasonable assumptions (either our favorite SA method shown here, or running the filters through March 2024 using our forecast) we got a monthly reading of about 2.5% MoM saar, roughly in line with the distributions. In any case, the real test will be at the beginning of 2024 when we will understand the amount of repricing for this year.
2023 carryover effect for 2024 at 1.1-1.3%. 2024 forecast close to 3%. With the December data, we now know the carry-over effect for 2024: 1.1-1.3% on NSA and SA data, respectively (reminder: this means that if the MoM of core HICP will be 0.0% in each month of 2024, the average of the YoY in 2024 will be 1.1-1.3%). This implies that reaching target (as average YoY) in 2024 is very unlikely, and that a forecast close to 3% is more reasonable at the moment.
(For a technical note on the concepts of “acquired inflation” and “carryover effect” see here and 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 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).
Medium-term model-based forecast is unchanged. The models forecasts are unrevised compared to the previous run (here). Using the unemployment rate as measure of “slack”, the forecast is at 2.9% (average YoY) in 2024, 2.6% in 2025, and 2.5% in 2026. Using the output gap (right panel in Figure 5), the model delivers a more dovish forecast: 2.7% in 2024, 2.1% in 2025, and 2.1% in 2026. The average of these forecasts is now in line with the latest ECB/NCBs staff forecasts.
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
Right direction, need more. Is the Euro area disinflating? Yes. Can core HICP reach and stay at target? That remains an open question. We continue to expect a prudent ECB in January, no reasons to deviate from the December message. After that, all options are on the table.