The January HICP report came in as expected and does not provide clarity on whether or when inflation will reach and remain at the target level. The overall picture remains largely unchanged. Today’s report indicates a distribution that is more dispersed around the target (January repricing), and still features a strong common component. Based on this, we continue to anticipate near-term MoM (saar) readings in the 2.0–2.5% range.
Additionally, our medium-term models yield the same forecast as at the time of the flash release, projecting inflation a bit above target in the medium term.
Acquired inflation for 2025 is 1.4% for core HICP and 1.3% for headline HICP in SA space. In our assessment, the risks surrounding the ECB/NCBs staff forecast are a bit skewed to the upside.
Evidence from the distributions
The distribution: centered around target. This month, the distribution is way more dispersed than the previous month (see ridge plot), as repricing took place in January. Looking at a longer horizon (Figure 1), the distribution shows no visible movement in the last 9 months and remains concentrated around the target.
Finally, the median (Figure 2) ticked down in January and remains close to the target.
Overall, this evidence suggests solid near-term readings slightly above target, with MoM (SAAR) expected in the 2.0–2.5% range.
Figure 1. Kernel of HICP excluding food and energy items changes (%, a.r.)
Figure 2. Median of HICP excluding food and energy items prices increase
Evidence from our CI model
Our CI model estimates that, excluding idiosyncratic shocks, the common component across items remains solid. Figure 3 illustrates the decomposition of the MoM change in core HICP into its “common” and “idiosyncratic” components.
According to the model, the common component increased by 19 basis points in January, consistent with the average of previous months, while the idiosyncratic shock is small and positive (4 bps). As in previous months, we define “true” core HICP as the measure that excludes the idiosyncratic component. Based on this approach, a rough estimate places the MoM (SAAR) for “true” core HICP at 2.3% in January.
The CI model’s signal in recent months aligns with the distribution trends, indicating that core HICP is currently running above target. The good news is that the 3m/3m rate now stands at 2.44% and is trending downward (see Figure 4 below).
An Excel file containing the results of the CI model is here.
Figure 3. Contributions to MoM changes of HICP excluding food and energy items
Note: the Figure shows the decomposition of the MoM percent changes of HICP prices excluding food and energy items. The contributions are estimated using our CI model, a 2-stage OLS-LASSO regression model.
Figure 4. Estimated “Common” component: YoY, 3m/3m a.r. and 6m/6m a.r.
Note: the Figure shows the 3m/3m at annual rate (green line), the 6m/6m at annual rate (red line), and the YoY (blue line) of the “common component” estimated using our CI model.
Implications for the medium-term forecast of core HICP
The model-based forecasts is unchanged from the flash release, as the latest data has not affected the quarterly nowcast. Projections based on the unemployment rate (average YoY) indicate: 2.5% in 2025, 2.3% in 2026, and 2.1 in 2027. Meanwhile, forecasts using the output gap indicate: 2.5% in 2025, 2.2% in 2026, and 2.2% 2027. On average, these projections are slightly above the most recent ECB/NCBs staff forecast.
Figure 5. Model-based medium-term forecast of core HICP (YoY)
Using Urate as a measure of “slack”
Using outputp gap as a measure of “slack”
Note: the confidence intervals (C.I.) are calculated using the estimated parameters distributions.
A comparison with the ECB/NCBs staff forecast
Model-based forecast outlook: Some upside risks for 2025. Table 1 compares our latest model-based forecast with the ECB/NCBs staff forecast. The 2024 carryover effect for 2025 is broadly similar to the 2023 carryover for 2024 for core HICP, while it is slightly higher for headline HICP. Acquired inflation (in sa space) in 2025 is 1.4% for core HICP and 1.3% for headline CPI. This implies that the risks around the ECB/NCBs staff forecast are a bit skewed to the upside.
(For a technical note on the concepts of “acquired inflation” and “carryover effect” see here and here).
Table 1. Comparison of forecasts
Note: the “UnderlyingInflation” forecast refers to the average of the two models shown in Figure 5.