Intermittent round, nothing has changed.
The outlook for the upcoming Governing Council meeting is straightforward: nothing has changed since the December round. Given this, we expect the Council to remain cautious—services inflation remains persistent, but concerns over growth continue to take precedence.
The next few months will be crucial in assessing the extent of repricing that typically occurs at the start of the year. At this stage, our estimates suggest that core inflation is likely to stay above target in the near future.
(For the record: we remain agnostic on whether the euro area will enter a recession. Barring any major shocks, we continue to believe that, if a recession does occur, it will likely be mild, while inflation could remain around or slightly above target.)
Main points:
The latest data on core HICP have been broadly in line with the ECB’s most recent macroeconomic projections. We estimate that core HICP prices are running at an annualized rate of 2.5%+, with persistently strong readings in the services sector. The 2024 carryover effect for 2025 suggests that risks around the ECB/NCBs’ 2025 forecast are balanced—or slightly tilted to the upside.
Figure 1. Evolution of cumulative unchained core HICP by year (index =1 on New Year’s Eve).
The medium-term forecast from the main model remains largely unchanged from the previous round. Incoming data have aligned closely with the model’s own projections, leaving the forecast largely unrevised. Notably, the model’s forecast remains above the latest ECB/NCBs projections and continues to indicate inflation staying above target at the end of the medium term.
Figure 2. Current vs previous GC round “main” model medium-term forecast of core HICP.
Note: the figure shows the model forecast of core HICP (YoY) in the current round (left panel) and the previous GC round (right panel). The red shadowed areas show the intervals of confidence from the estimated parameters distributions.
Trend inflation models. The average of the models for Q4 stands at 2.4%, slightly higher than the previous round but unchanged from the prior quarter. The estimate of “trend inflation” suggests that the core forecast will remain above the ECB/NCBs staff projections at the end of the medium term.
Figure 3. Trend inflation models as in Rudd (2020) for the Euro area.
Note: the chart shows the estimated trend inflation from econometric models as in Rudd (2020). The models are split into three groups. The first group is a collection of Phillips-curve (PC) type of trend inflation models in which a measure of long-term inflation expectations is used as a proxy of trend inflation. The second group is a collection of state-space unobserved component models in which we have modelled trend inflation either as a smooth trend or as an augmented local level. Finally, the third group of models is a collection of Time Varying Parameters Vector AutoRegressive models (TVP-VAR) with different endogenous variables. This set of models follows the FEDS Note by Rudd (2020) “Underlying Inflation: Its Measurement and Significance”.
Path of the ECB deposit rate. The observed trajectory of the ECB deposit rate appears more aligned with non-inertial Taylor rules, at least for 2024. Inertial Taylor rules indicate that the deposit rate could remain above 2% by the end of 2025, whereas non-inertial rules suggest it may fall slightly below 2% by that time.
Figure 4. Taylor rules
