(Apologies for the delay but we experienced an issue with Macrobond)
Revising a Bit Our View
The preliminary release of the Harmonised Index of Consumer Prices (HICP) was a bit below our expectations. While the deviation from our forecast falls well within the historical range of errors, we consider today’s reading particularly significant for interpreting inflation dynamics over the remainder of the year. In particular, the data suggest that core HICP, on both a month-over-month and quarter-over-quarter basis, is now trending much closer to the European Central Bank’s (ECB) inflation target than previously anticipated. Furthermore, it implies that YoY of core HICP inflation may reach the target level by the end of this year (2 tenths lower than our pre-release forecast).
For a detailed discussion of our expectations ahead of the upcoming Governing Council (GC) meeting, please refer to our pre-meeting briefing package (here). It is important to note that today’s figures will not be incorporated into the ECB staff projections.
Overall, we continue to believe that the risks to the ECB/NCBs staff projections for core HICP inflation remain tilted to the upside for 2025. However, downside risks for 2026 and 2027 have increased.
As always, we will await the final data release to conduct a more detailed analysis of the distribution.
Details
Core HICP is running at 2.0%.
We estimate that core HICP prices grew 15bps MoM (seasonally adjusted) in May, bringing the 3m/3m annualized rate to 2.0%, well below the YoY.
Looking forward, the most probable scenario is that the YoY of core HICP will decline progressively toward the 2.0% target by year-end.
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 1.9-2.1%. With the May data, we estimate acquired inflation for 2025 at 1.9% for core HICP (sa, and 2.1% nsa) and 1.8% for headline inflation (sa, 1.7% nsa).
In simple terms, the ECB/NCBs staff forecast for 2025 is running out of room. The MoM (sa) of core HICP should come in around 10bps in the remaining months of the year to meet the ECB/NCBs staff forecast.
(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 Revised Down 1 Tenth.
Today’s data had material implications for our Q2 nowcast (now revised to 2.1% QoQ saar) and for the models’ forecast. Projections based on the Urate (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, 2.0% in 2026, and 1.9% 2027.
On average, these projections are a bit above the most recent ECB/NCBs staff forecast in 2025 and in line/below in 2026 and 2027.
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.