The role of inflation subcomponents: applying maximally forward-looking core inflation to euro area countries

Petra Greso and Karin Klieber ()
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Karin Klieber: Oesterreichische Nationalbank

OeNB Bulletin, 2024, issue Q3/2024-1, 22

Abstract: For well-informed monetary policy decisions, central banks gather a wide range of data on the state of the economy, including several inflation measures. When pursuing a forward-looking monetary policy, policymakers ideally rely on measures that indicate where inflation is heading in the medium term, e.g. when shocks to the economy will have disappeared. To complement the set of inflation measures commonly used in the decisionmaking process, we construct maximally forward-looking core inflation, as proposed by Goulet Coulombe et al. (2024), for the euro area and its seven largest economies. Since the euro area aggregate summarizes diverse economic conditions and responses to shocks within the region, constructing maximally forward-looking core inflation for individual member states provides additional insights into the heterogeneity and commonalities across countries. Overall, our results confirm our measure’s strong performance in predicting medium-term inflation developments, which holds for all economies in the set. We identify key economic sectors that provide useful signals for future headline inflation and find a broad consistency across the seven largest euro area economies.

Keywords: underlying inflation; inflation forecasting; inflation subcomponents; euro area (search for similar items in EconPapers)
JEL-codes: C53 E31 E37 E52 (search for similar items in EconPapers)
Date: 2024
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