Euro area inflation and a new measure of core inflation

Claudio Morana

No 505, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: This paper introduces a new decomposition of euro area headline inflation into core, cyclical, and residual components. Our new core inflation measure, the structural core inflation rate, is the expected headline inflation, conditional to medium to long-term demand and supply-side developments. It shows smoothness and trending properties, economic content, and forecasting ability for headline inflation and other available core inflation measures routinely used at the ECB for internal or external communication. Hence, it carries additional helpful information for policy-making decisions. Concerning recent developments, all the inflation components contributed to its post-pandemic upsurge. Since mid-2021, core inflation has been downward, landing at about 3% in 2022. Cyclical and residual inflation -associated with idiosyncratic supply chains, energy markets, and geopolitical tensions- are currently the major threats to price stability. While some cyclical stabilization is ongoing, a stagflation scenario cum weakening overall financial conditions might emerge. A pressing issue for ECB monetary policy will be to face -mostly supply-side- inflationary pressure without triggering a financial crisis.

Keywords: headline inflation; core inflation; Russia'Â’s war in Ukraine; COVID-19 pandemic; sovereign debt crisis; subprime financial crisis; dot-com bubble; euro area; ECB monetary policy; trend-cycle decomposition (search for similar items in EconPapers)
JEL-codes: C22 C38 E32 F44 G01 (search for similar items in EconPapers)
Pages: 75
Date: 2022-12, Revised 2023-10
New Economics Papers: this item is included in nep-ban, nep-cis and nep-mon
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Working Paper: Euro area inflation and a new measure of core inflation (2023)
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