European Economics Analyst Euro Area—Introducing Our Nearcast Model for Inflation

Economics Research 19 September 2026 | 2:52AM BST

Euro Area—Introducing Our Nearcast Model for Inflation

n Energy prices remain highly volatile and, despite generally benign spot data since Giovanni Pierdomenico | the start of the Middle East crisis, core inflation forecasts for 2027 have Goldman Sachs International continued to drift up. Against this backdrop, we launch a new bottom-up Euro area inflation model that incorporates information from over 600 domestic and global price-related variables and is thus able to provide an updated near-term inflation forecast (or “nearcast”) on a daily basis. n Our model consists of three steps. First, we include all non-HICP variables, i.e., surveys, commodity forwards, and hard price data, in a dynamic factor model (DFM) of cost pressures. The underlying factors are intended to capture signals on specific upstream production costs, such as wages, energy costs, and other physical inputs prices. The estimated cost factors (a) summarise the information from several noisy global and domestic price-related variables, and (b) can be projected forward with the cross-product linkages allowed by the restricted transition matrix of the DFM. n Second, we leverage input-output tables to compute HICP component-specific cost indices as weighted averages of the upstream cost pressures estimated in the DFM. Third, we combine the resulting component-level cost indices and other domestic price indicators in statistical models (such as VARs) to forecast component-level HICP inflation. We can then aggregate these into a forecast for Euro area core and headline inflation that can be refreshed on a daily basis as new input data are released. n Our bottom-up model results in large out-of-sample forecast gains relative to simple benchmarks for all major components at the 3-, 6-, and 12-month horizon. More importantly, a pseudo real-time exercise suggests that the model would have performed better than other forecasts in 2022 by signalling inflation upside very early in the year. Our model performed broadly in line with other forecasts in 2023-25. n Over 2026, the model-implied headline inflation rate for end-2026 has risen sharply from below 2%yoy as of February to just under 4% as of now. Core inflation is currently projected to settle a touch above 2.6%yoy in December, up from 2% expected prior to the start of the Middle East war. Implied core pressures rose in H1, eased slightly in July, and have firmed up again since August.

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Goldman Sachs European Economics Analyst

n Our new model is currently close to our recently updated inflation forecasts but signals some upside risk to core goods pressures. We will run our nearcast model on a daily basis going forward and report the resulting projections in our daily Euro Area Data Update.