Nailed It!
The preliminary estimate of the Harmonised Index of Consumer Prices (HICP) was exactly in line with our expectations. The deviation from our forecast was minimal—2 basis points for core HICP—reinforcing the prevailing assessment: core HICP inflation in the EA is a persistent process centered at or sligthly above the ECB target. Based on current dynamics, the year-over-year rate of core HICP inflation is likely to reach the target level (or be sligthly above it) by year-end and is expected to remain in proximity to that threshold thereafter.
From a broader perspective, we assess that the risks surrounding the ECB and National Central Banks’ (NCBs) staff projections for core HICP inflation are currently balanced. Given that core inflation is anticipated to hover around the target, the policy rate can justifiably remain at a neutral stance for the foreseeable future—potentially for several months according to our projections.
As always, we will await the final data release in order to conduct a more granular and comprehensive analysis of the underlying distribution.
Details
Core HICP is running at 2.0%-ish.
We estimate that core HICP prices grew 20bps MoM (seasonally adjusted) in July, bringing the 3m/3m annualized rate to 2.0%, a bit below the YoY.
Looking forward, the most probable scenario is that the YoY of core HICP will decline progressively toward the 2.0% target by year-end.
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.
2025 Acquired Inflation at 2.2%. With the July data, we estimate acquired inflation for 2025 at 2.2% for core HICP (nsa, and 2.2% sa) and 2.0% for headline inflation (nsa, 2.0% sa).
This implies that mechanically the 2025 ECB/NCBs staff forecast is unlikely to be revised down going forward. However, the upside risks at this point appear limited for 2025. The risks for 2026 and 2027 are slightly to the upside according to our models.
(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 is Unrevised.
Today is the first time we put Q3 in-sample. We are working under the assumption that core prices will expand at an annual rate of 2.1% (QoQ saar) in Q3. Conditional on our nowcast, the model-based forecast is revised down a bit in 2026 compared to the preview, although it is little changed compared to previous runs. The revisions are due to our re-thining of some exogenous variables (import prices, urate, timing, etc..) and they are in the order of magnitude of 1-2 tenths.
Projections based on the unemployment rate (average YoY) indicate: 2.4% in 2025, 2.1% in 2026, and 2.1 in 2027. Meanwhile, forecasts using the output gap indicate: 2.4% in 2025, 2.0% in 2026, and 2.0% in 2027.
These projections are close to the most recent ECB/NCBs staff forecast for 2025 and a bit above them in 2026 and 2027.
Figure 2. 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.