Nailed it, Again!
This is not a bad reading for core. The January flash core HICP figure came in exactly as we expected: NSA level 116.06 vs 106.028 expected by us (our preview is here). The YoY of core HICP came in at 3.27% vs 3.25% expected by us. This is the second consecutive month in which core HICP comes in within 2bps of our forecast (see December flash here).
Be careful with seasonal adjustments, likely to overstate the MoM. Most likely, on your screen the MoM saar came in around 3½ percent. According to our calculation, this is an overstatement. Unless we get some crazy reading next month, the filters are likely to revise down the MoM in January going forward. A more realistic reading for January is around 2½ percent (MoM saar).
ECB can be happy about today’s report. Yes, headline was a bit stronger than expected. And yes, there are some question marks in some countries (i.e. Spain). But overall, if this is the “January repricing effect”, then it is validating the latest ECB/NCBs staff forecast.
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. In this part of the note, we generally provide estimates of the MoM in seasonally adjusted terms. However, this month we are not going to. The reason is that the filters are likely overstating the correct reading in SA space. For the record, the reader can see a comparison across seasonal adjustment methods, including our own, here (so please, do not be surprised if the ECB series comes in strong, it means little). Indeed, the reader should know that the SA estimates are subject, from time to time, to significant revisions ex-post. For instance, here the reader can see a comparison between the current and the previous vintage of our SA method. Our simulations show that unless we get a crazy reading next month (and the following), the filters are likely to revise down the MoM sa in January to about 2½ percent, which would be in line with the signal from the distributions. Not only, but a visual inspection of the unchained NSA level by year (Figure 1) reveals that in 2021 (which ended just above target) the MoM NSA in January was stronger than in 2024. Therefore, while it is still too early to declare victory because we can get a very strong reading next month, at this point the most likely scenario is that prices are growing sequentially in line with the distributions, around 2½ at annual rate.
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 preview run. (Note: because of the seasonal adjustment issues, we are, in any case, more careful than usual). Using the unemployment rate as measure of “slack”, the forecast is at 2.3% (average YoY) in 2024, 2.3% in 2025, and 2.3% in 2026. Using the output gap (right panel in Figure 5), the model delivers a more dovish forecast: 2.1% in 2024, 1.9% in 2025, and 1.9% in 2026. Please, note that the risks (intervals of confidence) are skewed to the downside. The average of these forecasts is now below 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? Maybe. We continue to expect a prudent ECB until March when the governing council will have fresh medium-term forecasts. Having said that, it seems that at this point the risks are skewed to the downside.