As expected, services inflation remains a concern.
Today’s HICP flash release came in exactly as expected. Our forecast error was minimal—just 1bps for headline HICP and 2bps for core HICP.
Taking a step back, the broader issue remains unchanged: there’s still no sign that services inflation is slowing. In 2024, services inflation has closely followed its 2023 trajectory, and this pattern appears to be continuing. We remain skeptical that a significant slowdown is imminent and expect inflation to remain sticky in the near term. Our models continue to project inflation above the ECB/NCBs staff forecasts, and today’s data largely leaves our outlook unchanged.
The big picture hasn’t shifted. On one hand, there’s no certainty that inflation will return to target. On the other, concerns about growth and trade tensions persist—yet the ECB remains focused solely on the latter.
As always, we’ll wait for the final reading to analyze the distribution in more detail.
Figure 0. HICP Services – NSA (unchained) index by year normalized to 1 on New Year’s Eve
Details
Core HICP is running at 2.5%.
We estimate that core HICP prices grew 20bps MoM (seasonally adjusted) in January, bringing the 3m/3m annualized rate to 2.5% (see Figure 2). This aligns with the YoY rate.
Looking ahead, the most likely scenario is that core HICP will continue at this pace in the near term, with the YoY rate gradually ticking down and stabilizing around 2.5%.
Figure 1. Core HICP NSA unchained index by year (index normalized to 1 on each New Year’s Eve).
Note: the figure shows the evolution of core HICP by year, normalizing the index at 1 on New Year’s Eve.
Figure 2. 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).
2025 Acquired Inflation at 1.4%. With the January data, we estimate acquired inflation for 2025 at 1.4% for core HICP (seasonally adjusted) and 1.3% for headline inflation.
In simple terms, it’s still early, but the ECB/NCBs staff forecast for 2025 is already looking a bit too low. Given current trends, we wouldn’t be surprised if they are once again forced to revise their projections upward.
(For a technical explanation of “acquired inflation” and the “carryover effect,” see here and here).
Table 1. Forecast comparison, carryover effect, and acquired inflation.
Medium-Term Model-Based Forecast Remains Unchanged.
Our model forecasts remain unchanged from the previous update, as the latest data confirm our Q1 nowcast of 2.5% QoQ saar.
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 latest ECB/NCBs staff forecast.
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.