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Underlying Composite Inflation (UCI): a novel indicator to track inflation developments

Author

Listed:
  • Valentina Aprigliano

    (Bank of Italy)

  • Francesco Corsello

    (Bank of Italy)

Abstract

This paper introduces the Underlying Composite Inflation (UCI), a novel model-based indicator designed to enhance the measurement of underlying inflation in the euro area. UCI is estimated by a dynamic factor model in the frequency domain to capture the persistent component of inflation. We also provide a probabilistic evaluation of the underlying inflation dynamics, additional insights into cross-country inflation dynamics and address the challenges posed by short-term volatility and idiosyncratic factors. UCI not only offers a more stable and refined signal of underlying inflation but also exhibits superior out-of-sample forecasting performance compared to both exclusion-based and model-based alternatives. These findings underscore the potential of UCI as a valuable tool for monetary policy, inflation monitoring, and risk assessment.

Suggested Citation

  • Valentina Aprigliano & Francesco Corsello, 2025. "Underlying Composite Inflation (UCI): a novel indicator to track inflation developments," Questioni di Economia e Finanza (Occasional Papers) 928, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_928_25
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    File URL: https://www.bancaditalia.it/pubblicazioni/qef/2025-0928/QEF_928_25.pdf
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    More about this item

    Keywords

    underlying inflation; inflation trend; dynamic factor model; frequency domain analysis;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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