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Measures of underlying inflation for the euro area

Author

Listed:
  • Ehrmann, Michael
  • Ferrucci, Gianluigi
  • Lenza, Michele
  • O'Brien, Derry

Abstract

Headline inflation can be noisy, blurring the signal on the medium-term inflationary pressure relevant for monetary policy. To help distinguish signal from noise in the data, central banks monitor measures of underlying inflation. As there are many ways of measuring underlying inflation, it is important to understand the properties of the various indicators and what factors may account for any divergence between them. This article describes in detail the measures of underlying inflation typically used at the ECB and evaluates them against a set of empirical criteria. Our results suggest that no one measure of underlying inflation is superior in all situations as the performance of the indicators varies over time. In practice, each indicator comes with merits and shortcomings, which calls for monitoring the full range of measures of underlying inflation. JEL Classification: C52, C82, E31

Suggested Citation

  • Ehrmann, Michael & Ferrucci, Gianluigi & Lenza, Michele & O'Brien, Derry, 2018. "Measures of underlying inflation for the euro area," Economic Bulletin Articles, European Central Bank, vol. 4.
    • Handle: RePEc:ecb:ecbart:2018:0004:3
    Note: 203739
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    File URL: https://www.ecb.europa.eu//pub/economic-bulletin/articles/2018/html/ecb.ebart201804_03.en.html
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    Keywords

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    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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