As expected.
Today’s HICP flash release came in exactly as expected for the third consecutive month. Our forecast error was 2bps for core HICP and 3bps for headline HICP.
Taking a step back, the broader issue remains unchanged: there’s still no significant sign that services inflation is slowing (although today’s reading is a touch lower than expected). We remain skeptical that a significant slowdown is imminent and expect inflation to remain sticky in the near term. Our models continue to project inflation above the ECB/NCBs staff forecasts, and today’s data leaves our outlook unchanged.
The big picture hasn’t shifted. On one hand, there’s no certainty that inflation will return to target. On the other, concerns about growth and trade tensions persist—will the ECB continue to be focused solely on the latter?
As always, we’ll wait for the final reading to analyze the distribution in more detail.
Details
Core HICP is running at 2.5%.
We estimate that core HICP prices grew 20bps MoM (seasonally adjusted) in March, bringing the 3m/3m annualized rate to 2.4%. This aligns with the YoY rate.
Looking ahead, the most likely scenario is that core HICP will continue at this pace in the near term, with the YoY rate stabilizing around 2.5%.
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 1.7%. With the March data, we estimate acquired inflation for 2025 at 1.7% for core HICP (seasonally adjusted) and 1.5% for headline inflation.
In simple terms, it seems to us that the ECB/NCBs staff forecast for 2025 is a bit low. Given current trends, we wouldn’t be surprised if they are once again forced to revise their projections upward.
(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 Remains Unchanged.
Today’s data had no material implications for the medium-term model-based forecast as they confirmed our Q1 nowcast.
Projections based on the unemployment rate (average YoY) indicate: 2.5% in 2025, 2.3% in 2026, and 2.1 in 2027. Meanwhile, forecasts using the output gap indicate: 2.5% in 2025, 2.2% in 2026, and 2.2% 2027.
On average, these projections are slightly above the most recent ECB/NCBs staff forecast.
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.