Underlying Composite Inflation (UCI): a novel indicator to track inflation developments

Valentina Aprigliano () and Francesco Corsello ()
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Valentina Aprigliano: Bank of Italy
Francesco Corsello: Bank of Italy

No 928, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper introduces the Underlying Composite Inflation (UCI), a novel model-based indicator designed to enhance the measurement of underlying inflation in the euro area. UCI is estimated by a dynamic factor model in the frequency domain to capture the persistent component of inflation. We also provide a probabilistic evaluation of the underlying inflation dynamics, additional insights into cross-country inflation dynamics and address the challenges posed by short-term volatility and idiosyncratic factors. UCI not only offers a more stable and refined signal of underlying inflation but also exhibits superior out-of-sample forecasting performance compared to both exclusion-based and model-based alternatives. These findings underscore the potential of UCI as a valuable tool for monetary policy, inflation monitoring, and risk assessment.

Keywords: underlying inflation; inflation trend; dynamic factor model; frequency domain analysis (search for similar items in EconPapers)
JEL-codes: C22 C53 C55 E31 E37 (search for similar items in EconPapers)
Date: 2025-04
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:opques:qef_928_25

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