A New Method for Measuring Underlying Inflation in Türkiye

Merve Capan, Ahmet Gulveren and Tuba Ozsevinc

Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

Abstract: In this study, we propose a trend inflation indicator by using the Multivariate Unobserved-Components Stochastic Volatility Outlier-Adjusted (MUCSVO) model to better capture the underlying inflation dynamics in Türkiye. Our measure effectively filters out temporary shocks and exhibits superior forecasting performance at horizons beyond three months. Moreover, results imply that the permanent component of inflation declined from 3.9 in October 2023 to 2.2 in June 2025. Services emerge as the dominant driver of trend inflation, contributing about 55% despite having only 31% of the consumption basket weight. These results highlight the importance of sectoral decomposition in understanding inflation persistence and improving monetary policy design. As an addition to the underlying trend inflation indicators currently monitored by the Central Bank of the Republic of Türkiye (CBRT), the MUCSVO model enhances the CBRT’s capacity to monitor underlying price dynamics.

Keywords: Unobserved component models; Trend inflation; Inflation forecasting; Monetary policy design (search for similar items in EconPapers)
JEL-codes: C32 E31 E37 E52 (search for similar items in EconPapers)
Date: 2026
New Economics Papers: this item is included in nep-ara and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:2605

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