Euro area: Inflation model predicts no surprise - Standard Chartered

Standard Chartered's inflation model uses surprise vs consensus for Spain core inflation to predict region-wide surprises. It predicts that euro-area core HICP inflation for October will be in line with consensus' 2.3% y/y number. Energy and producer price inflation trends offset the upside surprise from Spain's core inflation, Standard Chartered's Fixed Income Strategist Akrit Agarwal reports.

ECB rate cut in December remains base case despite market skepticism

"Our inflation surprise model predicts that October euro-area core inflation (to be released Friday, 31 Oct) will print at consensus, which is currently at 2.3% y/y. Our model essentially uses a surprise (for Spain core inflation) to predict another surprise, which bridges the gap between country inflation releases and the release of aggregate euro-area-wide inflation data that follows later."

"The key contributors to our prediction this month are (1) the 0.1ppt upside surprise from Spain's core inflation data, which we currently use as the surprise-based input to our model; this is offset by downside pressure from (2) energy and producer price inflation developments. Consensus forecasts may not have fully accounted for the pass-through of these factors to euro-area core inflation."

"In September, our model incorrectly predicted that euro-area core inflation would print 0.1ppt below consensus at 2.2% y/y, despite a large surprise to Spanish core inflation (0.2ppt to the downside). Since then, market pricing of ECB rate cuts has continued to drift lower. We still expect a final rate cut in December; our view is that inflation is on a decelerating trajectory, a trend that should gain momentum over the coming months. The market sees a December cut as an outside possibility, with just 2bps of cuts priced in."