Is Clarity on the Horizon? We expect the NSA levels of core and headline HICP to come in at 119.1 and 126.7 in January, respectively. Our core HICP forecast implies a MoM (saar) of around 2.5%, aligning with the signals from the distributions. Based on our projections, the YoY is expected to be 2.66% for core HICP and 2.51% for headline HICP in January. Figure 1 illustrates our MoM forecast errors for NSA data across both core and headline HICP. Over the past few months, the standard error and standard deviation of our MoM forecasts have been 4bps (7bps) and 11bps (17bps) for core and headline HICP, respectively. The January reading is unlikely to provide clear insights into whether and when core inflation will reach the 2% target—unless we see a significant downside surprise.
Medium-Term Models Remain Unchanged. Assuming our forecast holds, our medium-term models remain unchanged, as the Q1 model forecast (2.5% QoQ saar) would be validated by the data.
ECB Outlook: Big Picture Unchanged. From the ECB’s perspective, the broader picture remains intact. While our model does not indicate certainty in hitting the target over the medium term, we believe their risk assessment has evolved, with an increasing focus on growth.
Figure 1. Underlying Inflation MoM forecast errors (on NSA data).
Our forecast
Unlikely to bring clarity. We expect the NSA levels of core and headline HICP to come in at 119.1 and 126.7, respectively, for January. Our forecast assumes an NSA level of 112.47 for NEIGs and 123.05 for services. The NSA “unchained” levels by year for NEIGs and core services can be found here and here.
Our projections suggest no deceleration—yet—for HICP services in NSA terms. Specifically, we anticipate an NSA MoM growth rate of -98bps for core HICP and -29bps for headline HICP. In seasonally adjusted terms, core HICP is expected to rise by approximately 22bps MoM. However, we see some downside risks to our forecast, as the degree of repricing remains uncertain and could be lower than expected for both core services and core goods.
Our estimates imply YoY growth of 2.66% for core HICP and 2.51% for headline HICP. That said, as always, we do not place too much weight on sector-specific readings and will wait for the final distributions.
Overall, the January HICP report is unlikely to provide clarity on whether—and when—core inflation will reach the target, unless there is a significant downside surprise. Otherwise, we will likely have to wait until March. Given the NSA trajectory of core HICP, once we have data for the first three months of the year, the path of the entire year generally becomes clear.
Figure 2. 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. Assuming our MoM forecast holds, model-based projections for core HICP inflation would be little changed, as the Q1 model forecast (2.5% QoQ saar) would be validated by the incoming data. Model projections based on the unemployment rate (average YoY) suggest: 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 2. Model-based medium-term forecast of core HICP (YoY)
Using Urate as a measure of “slack”
Using output gap as a measure of “slack”
