Clarity on the Horizon? We expect the NSA levels of core and headline HICP to come in at 122.46 and 129.15 in July, respectively. Based on our projections, the YoY is expected to be 2.31% for core HICP and 2.06% for headline HICP in July. 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 (4bps) and 10bps (10bps) for core and headline HICP, respectively. The July reading is unlikely to provide clear insights into whether and when core inflation will reach the 2% target—unless we see a significant surprise. Risks are balanced.
Medium-Term Models Little Changed. The medium-term models is little changed, as the Q3 nowcast is only marginally stronger than the models’ own forecast. The medium-term model forecast remains close to the latest ECB/NCBs staff forecast.
ECB Outlook. From the ECB’s perspective the macro outlook is little changed, as risks remain balanced.
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 122.46 and 129.15, respectively, for July. Our forecast assumes an NSA level of 112.50 for NEIGs and 128.35 for services. The NSA “unchained” levels by year for NEIGs and core services can be found here and here.
We anticipate an NSA MoM growth rate of -16bps for core HICP and 4bps for headline HICP. In seasonally adjusted terms, core HICP is expected to rise by approximately 20bps MoM. We perceive the risks to be well balanced.
Our estimates imply YoY growth of 2.31% for core HICP and 2.06% 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 July HICP report is unlikely to provide clarity on whether—and when—core inflation will reach the target, unless there is a significant surprise.
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.
This is the first time we put Q3 in sample in the models and we assume a nowcast of 2.1% (QoQ saar for Q3). Conditional on this, the medium-term models is little changed, as the Q3 nowcast is only marginally stronger than the models’ own forecast. Projections based on the unemployment rate (average YoY) indicate: 2.4% in 2025, 2.3% in 2026, and 2.2% in 2027. Meanwhile, forecasts using the output gap indicate: 2.4% in 2025, 2.1% in 2026, and 2.1% in 2027.
These projections are now very close to the most recent 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”
