Data for core HICP printed a bit above the mean/median of the price changes distribution (see here for last distribution) and in line with the recent months. Near-term and medium-term forecasts remain unfavorable. The March flash HICP report confirms that core inflation is running high and persistent (6.1% MoM saar). As we wrote recently, the situation is worrying, especially if the dominant narrative will continue to be the wrong one (“it’s only/mainly” about negative supply/energy shocks”). We do see some moderation ahead (maybe) but nothing suggests that core prices will return to target any time soon. In our view and estimates, monetary policy should remain very hawkish. We are unsure a 4% terminal rate for the Euroarea is enough to bring core inflation back to target. We are also very puzzled to see many taking a 6% (ar) core reading as a “good one”. 6% is no good.
Details
Very high, persistent process. We estimate that in March core HICP prices grew 49bps MoM (sa) or 6.1% at annual rate. This brings the 3m/3m (ar) to 6.1%. March is the 21st consecutive month in which the 3m/3m (ar) runs above the YoY (5.7%), suggesting there is still room for the YoY to tick up again in the coming months. On a quarterly basis, we estimate that in Q1 core HICP prices have grown 6.1% (QoQ, ar). Acquired core HICP inflation for 2023 is 4.0%.
Figure 1. 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). The latest point on the chart is March 2023.
ECB staff will be forced to revise up (again) its core HICP forecast. Figure 2 shows history of the MoM (sa) of core HICP, together with our own judgmental forecast and the average consistent with the March ECB staff projection. Conditional on our forecast, the YoY is expected to average 5.6% in 2023, 1pp above the latest ECB staff forecast (4.6%). We estimate that the ECB staff has been upwardly surprised by the incoming data (March flash) by about 3 tenths (sa) in just one report. In order to meet the ECB staff forecast, core HICP should grow on average 16/17bps per month going forward. Time for the ECB staff to be a bit more realistic. Will they?
(For the record: we do expect moderation in core goods -and in core HICP itself- going forward, given the weak spending data. But if the US is of any guidance for the EA, we cannot expect a sharp disinflation (or deflation in core goods) because the Euro has not appreciated as much as the Dollar and because prices are downward nominally rigid, at least to some extent. In other words, even with some moderation ahead, it is very hard to see core HICP to quickly disinflate to 2% and, therefore, monetary policy becoming dovish).
Finally, under our own forecast (blue line in Figure 2), acquired inflation for 2024 is 2.2%, which makes the ECB staff forecast unrealistic not only for 2023 but also for 2024. A more realistic forecast for 2024 at this point is already above 3% (as opposed to the 2.5% of the ECB staff forecast).
Figure 2. Core HICP MoM (sa).
Note: the figure shows the MoM (sa, not annual rate) of core HICP prices. The blue line shows history and our own forecast. The red-dashed line shows the forecast consistent with the latest ECB staff macroeconomic projections.
Medium-term model-based forecast remains unfavorable. Our EA “main” Phillips curve model forecast is at 5.4% (Q4/Q4) in 2023 (average of four quarters at 5.5%), 4.0% in 2024, and 3.8% in 2025. Today the model revised down the forecast marginally, as the incoming data revised down the starting point (Q1), as well as with other revised assumptions (path of Euro and energy prices). The confidence bands (calculated from the estimated parameters distributions) suggest that the risks are skewed to the upside.
Figure 3. Core HICP: YoY forecast of our “main” Phillips curve model.
Note: the figure shows the YoY forecast of our “main” Phillips curve model for core HICP price inflation. The confidence intervals are calculated from the estimated parameters distribution. Last quarter in-sample is 2023:Q1 (our nowcast).
Headline HICP: the risks are to the upside. For brevity, we do not show our judgmental and model-based forecast for headline HICP. The bottom line is that they point to some upside risks around the ECB staff forecast, as they both suggest that the average of the YoY could be around 6.4% (as opposed to 5.3% of the latest ECB staff forecast).
Implications for the ECB staff and monetary policy. What we are witnessing in the Euro area seems a replay of what happened in the US. There are clear differences, of course. But there is something in common: the ECB staff is late and continues to be surprised by the incoming data (of core inflation) to the upside. In the next few months, headline inflation will moderate due to base effects and lower energy prices. But the real game is with core inflation, expectations, and wages. Right now, the ECB is losing. Time to wake up and follow the Fed.
(For the record, this last paragraph is a copy/paste from last 3 months and we suspect it will remain unrevised for a few months going forward)