The ECB's eastern problem
HICP forecast revisions show Germany driving the forecast still, but a cold wind is forming in the East
DURING THE holiday, country-level HICP projections associated with the revised staff forecasts were published by the ECB—produced, in conjunction with ECB staff, by National Central Banks (NCBs) and aggregated to give the Eurozone inflation path that informs policy.*
Unfortunately, we only get the headline and not core projections by country. But the revisions are revealing nonetheless. And since the ECB insists that they can only begin the cutting cycle once they are confident HICP will reach 2%, the drivers of the forecast are important.
Recall, back in June we noted here that the Bundesbank forecast for HICP was driving most of the overshoot from the 2% target then. Indeed, “Germany alone contributes … 80 percent of the overshoot. … the main driver of the fact that Eurozone inflation is above 2% in 2025.”
So if German inflation were to roll over, the 2025 forecast would be quickly pushed lower.
What has changed?