Wait and Hope
The July HICP report raises the same questions of the last few months. Our models continue to suggest disinflation going forward. However, reaching (and staying) at target is still a question mark: the distribution of price changes has not moved in recent months and it is centered above target. The CI model suggests that the common component is very solid and remains well above target. Finally, the medium-term models deliver a forecast higher than the latest macroeconomic projection exercise (and higher than target). Not only but services HICP (the “trend” of core HICP) are still running at around 4% saar at the margin and likely to continue in the near-term (see our PDF charts package).
The ECB has cut rates and it is now in “wait and hope” mode. So far, the data have been above the ECB/NCBs staff forecast. The suspect is that it can happen again going forward.
Evidence from the distributions
The distribution: centered above target. This month, the distribution is very similar to last month (ridge plot here). Extending the horizon (Figure 1), the distribution shows little changes in recent months and remains centered above target. Finally, the median (Figure 2) has ticked down in July.
Overall, this evidence continues to suggest solid near-term readings above target (MoM saar around 2.5%).
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 net of idiosyncratic shocks, the common component across items is solid. Figure 3 shows the decomposition of the MoM of core HICP in the “common” component and the “idiosyncratic” component. The model estimates that in July the common component increased by 25bps, in line with the average of the previous months, while the idiosyncratic shock is small (5bps). As we did in previous months, we consider as “true” core the one netting out the idiosyncratic part. Therefore, a rough estimate put the MoM (saar) of “true” core HICP at 3.0% in July. The signal of the CI model in the last few months is in line with the distributions and suggests that core HICP is running around 2.5%+ (ar) at the moment (see Figure 4 below).
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
Medium-term model-based unrevised. The models forecasts are unrevised compared to the time of the flash release. Using the unemployment rate as measure of “slack”, the forecast is at 2.9% (average YoY) in 2024, 2.6% in 2025, and 2.4% in 2026. Using the output gap, the forecast is: 2.9% in 2024, 2.5% in 2025, and 2.3% in 2026. The average of these forecasts is above the latest 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
Risks around the ECB/NCBs forecasts are to the upside. Table 1 shows a comparison between our latest forecast and the ECB/NCBs staff forecast. Acquired inflation for 2024 is 2.5% (2.7%) in SA (NSA) space. This implies that the risks around the ECB/NCBs staff forecast are to the upside, as there is little (or no) room to revise the forecast down going forward.
(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.