Solid print, services inflation an issue. Today’s HICP flash release was just a touch firmer than expected (core HICP nsa level at 120.45 vs 120.41 expected, headline HICP nsa level at 127.03 vs 126.91). The small upward surprise offset the downward surprise of last month. Zooming out, the issue remains the same: there is no evidence that services inflation is slowing down. In 2024, including in October, services prices are tracking closely their 2023 evolution. We remain skeptical that services inflation can slowdown significantly in the near-term and we suspect that it will remain sticky going forward.
Having said that, at this point it is pretty clear that the ECB focus is on growth. Our models forecast remain above the ECB/NCBs staff forecast, and today they are unrevised. As we said, the impression is that there is no appetite in Frankfurt to take signal from services inflation, and that the risks have shifed even if, to us, a question mark remains (can the Euro area go back and stay at target?).
As usual, we wait for the final reading to assess the distributions.
Figure 0. HICP Services – NSA (unchained) index by year normalized to 1 on New Year’s Eve
Details
YoY at 2½+ percent at the end of the year. We estimate that in October core HICP prices grew 22bps MoM (sa). This brings the 3m/3m (ar) to 2.6% (Figure 2). The 3m/3m (ar) remains above the YoY. 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 2.8-2.9%. With the October data, we estimate that acquired inflation for 2024 is 2.8% (2.9%) in core SA (NSA) HICP space. This implies that the there is little room for the staff (core) forecast to be revised down in 2024.
(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 forecast is unrevised. The models forecasts are unrevised compared to the preview, as the tiny downward surprise did not alter the quarterly nowcast. Using the unemployment rate as measure of “slack”, the forecast is at 2.8% (average YoY) in 2024, 2.5% in 2025, 2.3% in 2026, and 2.1% in 2027. Using the output gap, the forecast is: 2.8% in 2024, 2.4% in 2025, 2.2% in 2026, and 2.2% in 2027. The average of these forecasts is a bit 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.