Unlikely to bring clarity. We expect the NSA level of core and headline HICP at 118.250 and 125.600, respectively. Our forecast for core HICP is consistent with a MoM (saar) around 2 percent, in line with the signals of the distributions. Conditional on our forecast, the YoY on NSA data is expected at 3.06% for core HICP and at 2.66% for headline HICP. The March reading is unlikely to bring clarity to whether (and when) core inflation can (will) reach the 2% target. Figure 0 shows our MoM forecast errors (on NSA data) for both, core and headline HICP.
Medium-term models remain a bit above the ECB/NCBs staff forecast. Conditional on our forecast, the medium-term models are little changed compared to last run. The forecast is a bit above the latest ECB/NCBs staff forecast. Overall, the risks around the ECB/NCBs staff forecast appear well balanced. To us, a question mark remains about whether the ECB can cut rates in June.
Figure 0. Underlying Inflation MoM forecast errors (on NSA data).
Our forecast
Unlikely to bring clarity. We expect the NSA level of core HICP and headline HICP at 118.250 and 125.600, respectively in March. Our forecast is based on the assumption that the NSA level of NEIGs prints at 114.950 and services prints 120.150 (the NSA “unchained” level by year of NEIGs and core services can be seen here and here, respectively). Our forecast corresponds to a NSA MoM growth rate of 122bps for core HICP and 98bps for headline HICP. In SA terms, we expect core HICP to expand at around 15bps MoM. The risks around our forecast are well balanced. Our forecast implies the YoY of core HICP and headline HICP at 3.06% and 2.66%, respectively. In any case, as usual, we do not put much weight on the sectoral readings, and we will wait for the final distributions. Overall, the March HICP report is unlikely to bring clarity to whether and when core inflation can/will reach target as opposed to remaining above target (at around 2.5%) – see Figure 1.
Note: The “unchained” index of core HICP is shown in Figure 1 (for a discussion about “unchained” HICP see here and here). For the record: the YoY of the unchained core HICP index is expected at 2.77% in March. A chart comparing the YoY of chained (published) vs unchained core HICP is here. The evidence of the unchained index suggests that the YoY of the chained (published) index has room to fall further going ahead.
Figure 1. 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. Conditional on our MoM forecast, the models forecasts are little changed compared to the previous run.
The “main” model forecast (sample ends in Q1)continues to project core inflation to moderate going forward but with no certainty of reaching target. The model forecast using the unemployment rate (average YoY) is: 2.7% in 2024, 2.6% in 2025, and 2.4% in 2026. Using the output gap is: 2.7% in 2024, 2.2% in 2025, and 2.0% in 2026. The average of these forecasts is a bit above the latest ECB/NCBs staff forecasts.
Figure 2. Model-based medium-term forecast of core HICP (YoY)
Using Urate as a measure of “slack”
Using outputp gap as a measure of “slack”
Conclusion
Can the ECB cut? We are prudent because the March HICP report is unlikely to bring clarity (again, we invite the reader to study carefully Figure 1). The ECB sounds dovish at the moment but please, remember that the latest forecasts did not include the February HICP. At the moment, to us, it is very unclear if the ECB can cut in June.