EZ HICP Review: Core Disinflation Flattening Out?
Very much having affected ECB thinking, there has been repeated positive EZ news in the form of falling inflation and somewhat broadly so. This continued in the March HICP numbers, with the 0.2 ppt drops in both headline and core being a notch more sizeable than most anticipated. Regardless, the headline, at 2.4%, continued its recent decline although the latest core (2.9%) exceeded the ECB Q1 projection of 3.0% by 0.1 ppt. Somewhat disappointedly, the latter did not encompass more discernibly softer y/y services inflation, its rate at 4.0% for a fifth month running. This is notable as the ECB has been somewhat troubled by the failure of services inflation to have fallen in the last few months, and its apparent stability may harden some of the hawks worries about aspects of price resilient not least as monthly adjusted numbers (Figure 2) have also shown some fresh resilience, if not revival, notably on a core basis. The data do not make the case for rapid ECB easing any greater; we still see three 25 bp cuts this year.
Figure 1: Headline and Core Inflation Falling Further
Source: Eurostat, CE
Below-Target Inflation Looming in H2 Despite Resilient Services
Dominated by a further fall in food inflation, March saw services stay at 4.0% in y/y terms, but with core goods helping take the core down in turn. The upside risks from fuel prices and from rents/eating out may also have been behind the slightly firmer than expected services numbers. Regardless, possibly encompassing added volatility from the early Easter this year, and despite the rise in oil prices of late, we still envisage that the headline now hit target us in summer 2024, well over a year earlier than the ECB envisages, and then undershoot through 2025, while the core should continue to fall in the interim regardless.
There are ever-clearer signs of soft underlying inflation at least in terms of non-energy goods and also in terms of persistent price pressures which are now running around the 2% target on an overall basis and even more so for core measures. However, there are signs that such underlying measures have stopped falling (Figure 2), not least on the ECB’s preferred short-term inflation indicator. Moreover, services inflation has not fallen in y/y terms, a stability seen in seasonally adjusted m/m numbers, the question is whether this is true price persistence linked to high wages or reflection of one-off factors such as indirect tax moves. At this juncture, this is still something we think this is more noise than fresh trend but will continue to monitor closely.
Figure 2: Adjusted m/m Core Price Pressures No Longer Falling?
Source: ECB, CE