A quick note: our fear came true. In our previous notes (see here) we flagged the risk of getting a very large core inflation MoM (saar) reading in July in some countries. In Spain, the data is way worse than the worst of our fears. (Note: “Core” inflation in Spain is defined as the index excluding unprocessed food and energy)
We never over-react to a single data point. We will evaluate the EA core HICP figure on Monday. For the time being, we remind that in our estimates the risks around the ECB/NCBs forecast are still to the upside but it continues to be unclear whether there is an hedge in this environment.
The evidence
An incredibly high reading in July. Back in May, we wrote a note (here) to warn that the EA data was not as weak as many were suggesting using Spain core CPI as an example. Then, a few weeks ago (here) we warned about “seasonal mines” using, again, core CPI in Spain as an example. In our note, we forecasted a core CPI reading in Spain of around 7.5% MoM (saar). Back then, the prediction looked like an upper bound to most. It turned out to be very optimistic, given that we got a reading which is almost the double of that. The figure below shows the estimated MoM saar for core CPI in Spain. (Not only, but other data are not encouraging, see for instance the NSA level of CPI services in France, here).
Note: the figure shows the MoM (saar) of core CPI in Spain. The level is seasonally adjusted using X-13 (SEATS option).
Implications for the ECB
Fasten your seat belts (again). This is what we fear: the ECB/NCBs staff forecast is still behind the curve and policymakers do not understand neither the mechanics of the forecast, nor the roots of this inflationary episode. Ask yourself: do you really think that any of the Governing Council members could see a 13% MoM core inflation coming in July? We hope to be wrong, although so far, the evidence is in our favor. We will re-assess once we will run the models on Monday but we fear that what happened today with Spain can easily happen in other countries and in other months for the rest of the year (the list of countries/months with seasonal mines is in this note). Yesterday Lagarde sounded confusing, as usual. The confusion is, in our view, likely to continue.