Unlikely to bring clarity. We expect the NSA level of core and headline HICP at 116.626 and 124.500, respectively. Our forecast for core HICP is consistent with a MoM (saar) around 2½ percent, in line with the signals of the distributions. Conditional on our forecast, the YoY on NSA data is expected at 2.92% for core HICP and at 2.69% for headline HICP. The February reading is unlikely to bring clarity to whether (and when) core inflation can (will) reach the 2% target. Figure 0 shows our MoM forecast errors (on NSA data) for both, core and headline HICP.
Medium-term models below the ECB/NCBs staff forecast in 2024 but above it at the end of the medium-term. Conditional on our forecast and a Q1 nowcast of 1.8% (QoQ saar), the medium-term models are little changed compared to last run. The forecast is a bit below the latest ECB/NCBs staff forecast in 2024 but slightly above it in 2026. Overall, the risks around the ECB/NCBs staff forecast appear well balanced.
Figure 0. Underlying Inflation MoM forecast errors (on NSA data).
Our forecast
Unlikely to bring clarity. We expect the NSA level of core HICP and headline HICP at 106.626 and 124.500, respectively in February. Our forecast is based on the assumption that the NSA level of NEIGs prints at 112.650 and services prints 118.950 (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 50bps for core HICP and 73bps for headline HICP. In SA terms, we expect core HICP to expand at around 20bps MoM. The risks around our forecast are well balanced. Our forecast implies the YoY of core HICP and headline HICP at 2.92% and 2.69%, respectively. In any case, as usual, we do not put much weight on the sectoral readings, and we will wait for the final distributions. Overall, the February HICP report is unlikely to bring clarity to whether and when core inflation can/will reach target as opposed to remaining above target (at around 2.5%) – see Figure 1.
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 2.68% in February. 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 Q1 nowcast at 1.8% QoQ saar, the models forecasts are unrevised compared to the previous run (here). (We remind the reader that the current forecast is a bit more tentative than usual due to seasonal adjustment issues.)
Using the unemployment rate as measure of “slack”, the forecast is at 2.6% (average YoY) in 2024, 2.5% in 2025, and 2.4% in 2026. Using the output gap (right panel in Figure 5), the model delivers a more dovish forecast: 2.5% in 2024, 2.2% in 2025, and 2.0% in 2026. The average of these forecasts is now a bit below the latest ECB/NCBs staff forecasts in 2024 but slightly above it in 2026.
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
ECB on hold. We are prudent because the February HICP report is unlikely to bring clarity (again, we invite the reader to study carefully Figure 1). In this circumstance, we expect the ECB to be “on hold”. In our view, conditional on our forecast, it is very hard to see the new ECB/NCBs staff forecast below target at the end of the medium-term at the March round.