Further progress. The December HICP report should bring additional good news. We expect the NSA level of core and headline HICP at 117.158 and 124.124, respectively. Our forecast for core HICP is consistent with a MoM (saar) around 2½, a bit above the signals of the distributions*. Conditional on our forecast, the YoY on NSA data is expected at 3.4% for core HICP and at 3.0% for headline HICP. Our forecast is marginally below consensus.
Medium-term models in line with ECB/NCBs staff forecast. Conditional on our forecast and a Q4 nowcast of 2.3% (QoQ saar), the medium-term models deliver a forecast close to target at the end of the medium-term. As previously discussed (here), the models forecast is now in line with the ECB/NCBs staff forecast and the risks are well balanced. The staff can always revise up the forecast but in our view and estimates, at this point an upward revision can only come from an upward surprise of the incoming data and not from upper pressure of “slack” (see our note here). In a nut shell, we are in a “wait and see” mode, at least until the end of January when a new quarter will enter the models sample.
*It is possible that the filters on Friday will show a MoM (saar) in December way above 3% and a downward revision (even in negative territory) of November. However, under reasonable assumptions for Jan-Feb-Mar, we expect ex-post the December MoM to be around 2½%, as written above (and November around 1% MoM saar).
Our forecast
Consistent with 2½ percent. We expect the NSA level of core HICP and headline HICP at 117.158 and 124.124, respectively in December. Our forecast is based on the assumption that the NSA level of NEIGs prints at 114.600 and services prints 118.600 (the NSA “unchained” level by year of NEIGs and core services can be seen here and here, respectively). Our forecast corresponds to a NSA MoM growth rate of 47bps for core HICP and 22bps for headline HICP. In SA terms, we expect core HICP to expand at around 21-22bps MoM. The risks around our forecast are well balanced. Our forecast implies the YoY of core HICP and headline HICP at 3.4% and 3.0%, respectively in December. In any case, as usual, we do not put much weight on the sectoral readings, and we will wait for the final distributions.
Note: The “unchained” index of core HICP is shown in Figure 1 (for a discussion about “unchained” HICP see here and here). For the record: the YoY of the unchained core HICP index is expected at 3.0% in December. A chart comparing the YoY of chained (published) vs unchained core HICP is here. The evidence of the unchained index suggests that the YoY of the chained (published) index has room to fall further going ahead.
Figure 1. NSA “unchained” core HICP level by year (1 = new year’s eve)
Implications for the “main” model
Implications for the medium-term model-based forecast of core HICP price inflation. Conditional on our MoM forecast and a Q4 nowcast (at 2.3% QoQ saar), 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 2. Model-based medium-term forecast of core HICP (YoY)
Using Urate as a measure of “slack”
Using outputp gap as a measure of “slack”
Conclusion
Right direction, need more. In recent communication, Lagarde was prudent. On the one hand, the data are cooperating but, on the other hand, some upside risks (second round effects, January repricing, etc..) remain. Not only, but while the data have been on the soft side, it is not enough neither to project core HICP at target in the medium-term nor a recession. Putting everything together, it seems that the January 2024 Governing Council meeting will be on autopilot (trying to push back against relaxing financial conditions). After that, all possibilities are on the table, including a March cut.