Some moderation. The September HICP report should (finally) bring some good news with the level of “unchained” core HICP expected to cross over its 2022 path. Our forecast is a bit above consensus; the risks are well balanced. Because we just got the Governinc Council, this month we keep it simple: unless we get a large downward surprise, the big picture should remain the same because we expect the fundamental risk for the bond market (above target in the medium-term) to remain there. Ultimately, “for longer” means “for longer” and, at this point, a single HICP print makes little difference for monetary policy.
An Excel file containing the forecast is available upon request.
Our forecast
Finally crossing the 2022 path. We expect the NSA level of core HICP and headline HICP at 117.477 and 124.700, respectively in September. Our forecast corresponds to a NSA MoM growth rate of 60bps for core HICP and 54bps for headline HICP. In SA terms, we expect both indexes to expand at around 30bps MoM. Our forecast is quite generous in terms of disinflation because the average NSA MoM in September between 2014 and 2019 was 43bps for core HICP; nevertheless, we remain above consensus (as we wrote, at this point the burden of the proof is in the disinflation camp; if any, we prefer to get a downward surprise this month). We expect the September reading to be roughly in line with the signals from the distributions and the CI-C model. Our forecast implies the YoY of core HICP and headline HICP at 4.91% and 4.56%, respectively in September.
The “unchained” index of core HICP is shown in Figure 1 (for a discussion about “unchained” HICP see here and here). Our forecast is based on the NSA assumption that core goods will rebound but core services are expected to drop modestly. We expect the NSA level of NEIGs at 114.000 in September, and the level of core services at 119.500. The NSA “unchained” level by year of NEIGs and core services can be seen here and here, respectively. In any case, as usual, we do not put much weight on the sectoral readings, and we will wait for the final distributions.
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 implications for the medium-term model of core HICP would be trivial. The model forecast is at 5.0% (Q4/Q4) in 2023 (average of four quarters at 5.3%), 3.3% in 2024, 3.1% in 2025, and 3.05% in 2026. The latest run is here.
Is moderation coming? Will the YoY fall from here?
Yes, moderation is coming. But that is not the point, in our view. We generally get the question: “is moderation coming?”. After 400bps of hikes, we would be surprised if core HICP would not moderate going forward, at least to some extent. Indeed, all models indicates that core should deviate from its 2022 path, maybe in September or likely by the end of the year. Not only, but as we explained in this note (link), the December chaining procedure of the HICP is currently boosting the level of the series and consequently the YoY. The YoY of the “unchained” core HICP index is 4.6% in August (here), and other chaining methods (here) come to similar conclusions. As such, sooner or later the gap between published YoY and alternative indexes will close; and we expect the YoY of published core HICP to start falling soon.
If so, why aren’t we taking more signals from the downside risks signalled by these approaches? Because the fundamental issue faced by the ECB is not about the near-term (the YoY better fall soon because otherwise we put other hikes on the table!). The real issue for monetary policy is always the same: is there a strong indication that, net of a recession, core HICP can return back to target? Unfortunately, the answer at the moment is “not really”. And until we (and the ECB) will be able to take that risk of the table, we continue to expect the long-end of the curve to remain under pressure precisely because (i) the ECB is not as hawkish as it used to be, and (ii) the data still cannot rule out that risk.
Conclusion
ECB message was loud and clear. The ECB message was loud and clear: “for longer” (a.k.a. “steepener”, as we expected). We do see some risks this week, especially after the big runup of last week. But unless we will get a big downward surprise (always possible, although not the baseline), the big picture should remain the same for the ECB: “for longer” [until a recession will hit, ndr].