Navigating with a Compass: Charting the Course of Underlying Inflation

Nuno Lourenco, Joao Quelhas and Antonio Rua
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Nuno Lourenco: Banco de Portugal
Joao Quelhas: Banco de Portugal and Nova SBE
Antonio Rua: Banco de Portugal and Nova SBE

International Journal of Central Banking, 2025, vol. 21, issue 3, 293-326

Abstract: We propose a novel tool to gauge price pressures resorting to circular statistics, the inflation compass. It offers a reliable indication of inflationary pressures in the euro area since its inception. Unlike most alternative measures of underlying inflation, the inflation compass does not exclude any inflation subitems. Moreover, it is not revised, providing real-time signals about the course of underlying inflation. We also provide evidence of the usefulness of the inflation compass to forecast overall inflation, even during periods of increased turbulence, such as the COVID-19 pandemic or the recent inflation surge. Lastly, our approach can handle large-dimensional data straightforwardly.

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2025:q:3:a:7

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