Another Killer Reading
Services, “acquired” inflation continue to be an issue. Since the beginning of the year, we have been delivering a message: we are not sure that core HICP can reach and stay at target because there is no sign of deceleration in HICP services. Today’s reading is another killer reading, as services inflation came in even higher than we expected. While we have not reacted to the incoming data yet, at this point we will likely raise our near-term forecast to reflect the persistency of services HICP inflation. Therefore, we see the risks around our forecast to be skewed to the upside (we currently expect the YoY of core HICP at 2.5% in December 2024, likely to be revised up once we will get details). Not only, but “acquired inflation” for 2024 is now at 2.8% (in NSA space), which leaves virtually no room to the ECB/NCBs staff to revise down the forecast (or in other words, the risks are totally skewed to the upside around their forecast now).
ECB is in “wait and see” mode, unlikely to change until the end of August. We continue to be puzzled: given the evidence in Figure 0, how can the ECB (and most of the sell-side) be so sure that core HICP will reach and stay at target? To us, at least in terms of risk-management, the ECB should realize that so far, we have seen no progress at all in services, which is the “trend” of core.
As usual, we wait for the final reading to assess the distributions.
Figure 0. HICP services NSA unchained index by year (index normalized to 1 on each New Year’s Eve)
Details
Cannot rule out 2½+ percent at the end of the year. We estimate that in June core HICP prices grew 22-23bps MoM (sa) (here a comparison across filters). This brings the 3m/3m (ar) to 2.9%, in acceleration (Figure 2). The 3m/3m (ar) is now in line with the YoY, signaling that the annual variation should go sideways in the coming months. The most likely scenario is for the YoY of core HICP to remain above target going forward.
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).
2024 acquired inflation at 2.4-2.8%. This is now a problem for the ECB. With the June data, we estimate that acquired inflation for 2024 is 2.4% (2.8%) in core SA (NSA) HICP space. This implies that the there is little room for the ECB/NCBs staff forecast to be revised down going forward. If anything, the risks are to the upside.
(For a technical note on the concepts of “acquired inflation” and “carryover effect” see here and here).
Table 1. Forecast comparison, carryover effect, and acquired inflation.
Medium-term model-based revised up marginally. The models forecasts are revised up marginally compared to the preview, given the small upward surprise. Using the unemployment rate as measure of “slack”, the forecast is at 2.8% (average YoY) in 2024, 2.6% in 2025, and 2.4% in 2026. Using the output gap, the forecast is: 2.8% 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 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.