Measures of underlying inflation

The primary objective of Magyar Nemzeti Bank is to achieve and maintain price stability. The central bank of Hungary defines its 3 per cent inflation target in terms of the consumer price index. However, this indicator is quite volatile, and many of its components are sensitive to temporary shocks. Consequently, the CPI also captures price changes that monetary policy should generally look through. In this context, the need has arisen to develop measures of inflation which capture medium-term underlying inflationary pressures in the economy. Most central banks, including the MNB, use several alternative measures to capture underlying inflation. These measures have increasingly become an important part of the decision-making process and communication with market participants. In respect of the domestic measures of inflation, our results can be summarised as follows. The set of underlying inflation indicators developed and used by the MNB are in line with international best practices. Movements in the various underlying measures of Hungarian inflation are significantly less volatile than those in the consumer price index, and the indicators have a robust predictive power for expected future movements in inflation. At the same time, the average value of underlying measures is different from average inflation over the long run, which makes the quantitative assessment of the indicators more difficult.