As Expected. The June final HICP matched the flash figures. This confirms our initial view and doesn’t change our overall assessment. The data distribution hasn’t shifted much lately and is still centered around target. Our CI model also matches what the distribution shows. We continue to expect month-over-month annualized inflation readings to stay close to the ECB’s goal in the near term.
Looking ahead, the ECB and national central banks now have core inflation forecasts that are largely in line with ours. We see the risks around this outlook as balanced. However, our models do project slightly higher overall (headline) inflation for next year compared to what ECB and national staff currently expect.
Overall, we think the ECB is staying cautious for now, taking a “wait-and-see” approach.
Evidence from the distributions
The distribution: centered around target. This month, the distribution is similar to the previous month (see ridge plot). Looking at a longer horizon (Figure 1), the distribution shows little movement in the last 9 months and remains concentrated around the target.
Finally, the median (Figure 2) rebounded in June and the YoY remains close to the target.
Overall, this evidence suggests solid near-term readings, with MoM (SAAR) around target.
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, excluding idiosyncratic shocks, the common component across items remains solid. Figure 3 illustrates the decomposition of the MoM change in core HICP into its “common” and “idiosyncratic” components.
According to the model, the common component increased by 21 basis points in June, in line with the average of previous months, while the idiosyncratic shock is null (0 bps). As in previous months, we define “true” core HICP as the measure that excludes the idiosyncratic component. Based on this approach, a rough estimate places the MoM (SAAR) for “true” core HICP around 2.5% in June.
The CI model’s signal in recent months aligns with the distribution trends, indicating that core HICP is currently running above target. The good news is that the 3m/3m rate now stands at 2.5% and moving roughly sideways (see Figure 4 below).
An Excel file containing the results of the CI model is here.
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.
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
The model-based forecast is little changed from the flash release.
Projections based on the unemployment rate (average YoY) indicate: 2.4% in 2025, 2.2% in 2026, and 2.1 in 2027. Meanwhile, forecasts using the output gap indicate: 2.3% in 2025, 1.9% in 2026, and 2.0% in 2027.
These projections are now very close to the most recent 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
Comparison with ECB forecasts. Table 1 compares our latest model-based forecast with the ECB/NCBs staff forecast. With the June data, we estimate acquired inflation for 2025 at 1.9% for core HICP (sa, and 2.1% nsa) and 1.7% for headline inflation (sa, 1.8% nsa). Acquired inflation for 2025 supports the revised ECB/NCBs staff forecast for this year. 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.
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.