IDEAS home Printed from https://ideas.repec.org/p/pri/econom/2019-30.html
   My bibliography  Save this paper

Trend, Seasonal, and Sectoral Inflation in the Euro Area

Author

Listed:
  • James H. Stock

    (Harvard University)

  • Mark W. Watson

    (Princeton University)

Abstract

An unobserved components model with stochastic volatility is used to decompose aggregate Euro area HICP inflation into a trend, seasonal and irregular components. Estimates of the components based only on aggregate data are imprecise: the width of 68% error bands for the seasonally adjusted value of aggregate inflation is 1.0 percentage points in the final quarter of the sample. Estimates are more precise using a multivariate model for a 13-sector decomposition of aggregate inflation, which yields a corresponding error band that is roughly 40% narrower. Trend inflation exhibited substantial variability during the 2001-2018 period and this variability closely mirrored variation in real activity

Suggested Citation

  • James H. Stock & Mark W. Watson, 2019. "Trend, Seasonal, and Sectoral Inflation in the Euro Area," Working Papers 2019-30, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2019-30
    as

    Download full text from publisher

    File URL: http://www.princeton.edu/~mwatson/papers/EA_Sectoral_Inflation_Stock_Watson_20190127.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Sangjoon Kim & Neil Shephard & Siddhartha Chib, 1998. "Stochastic Volatility: Likelihood Inference and Comparison with ARCH Models," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 65(3), pages 361-393.
    2. Robert J. Gordon, 1975. "Alternative Responses of Policy to External Supply Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(1), pages 183-206.
    3. Cogley, Timothy & Sargent, Thomas J. & Surico, Paolo, 2015. "Price-level uncertainty and instability in the United Kingdom," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 1-16.
    4. James H. Stock & Mark W. Watson, 2007. "Why Has U.S. Inflation Become Harder to Forecast?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 3-33, February.
    5. Elmar Mertens, 2016. "Measuring the Level and Uncertainty of Trend Inflation," The Review of Economics and Statistics, MIT Press, vol. 98(5), pages 950-967, December.
    6. Timothy Cogley & Thomas J. Sargent, 2015. "Measuring Price-Level Uncertainty and Instability in the United States, 1850–2012," The Review of Economics and Statistics, MIT Press, vol. 97(4), pages 827-838, October.
    7. 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.
    8. Laurence Ball & Stephen G. Cecchetti, 1990. "Inflation and Uncertainty at Long and Short Horizons," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1), pages 215-254.
    9. James H. Stock & Mark W. Watson, 2007. "Why Has U.S. Inflation Become Harder to Forecast?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 3-33, February.
    10. Michael F. Bryan & Stephen G. Cecchetti, 1994. "Measuring Core Inflation," NBER Chapters, in: Monetary Policy, pages 195-219, National Bureau of Economic Research, Inc.
    11. Nerlove, Marc & Grether, David M. & Carvalho, José L., 1979. "Analysis of Economic Time Series," Elsevier Monographs, Elsevier, edition 1, number 9780125157506 edited by Shell, Karl.
    12. Omori, Yasuhiro & Chib, Siddhartha & Shephard, Neil & Nakajima, Jouchi, 2007. "Stochastic volatility with leverage: Fast and efficient likelihood inference," Journal of Econometrics, Elsevier, vol. 140(2), pages 425-449, October.
    13. Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262112388, December.
    14. James H. Stock & Mark W. Watson, 2007. "Why Has U.S. Inflation Become Harder to Forecast?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 3-33, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. James H. Stock & Mark W. Watson, 2019. "Trend, Seasonal, and Sectoral Inflation in the Euro Area," Working Papers Central Bank of Chile 847, Central Bank of Chile.
    2. James H. Stock & Mark W. Watson, 2020. "Trend, Seasonal, and Sectorial Inflation in the Euro Area," Central Banking, Analysis, and Economic Policies Book Series, in: Gonzalo Castex & Jordi Galí & Diego Saravia (ed.),Changing Inflation Dynamics,Evolving Monetary Policy, edition 1, volume 27, chapter 9, pages 317-344, Central Bank of Chile.
    3. Hervé Le Bihan & Danilo Leiva-León & Matías Pacce, 2023. "Underlying inflation and asymetric risks," Working Papers 2319, Banco de España.
    4. James H. Stock & Mark W. Watson, 2016. "Core Inflation and Trend Inflation," The Review of Economics and Statistics, MIT Press, vol. 98(4), pages 770-784, October.
    5. Juan Angel Garcia & Aubrey Poon, 2022. "Inflation trends in Asia: implications for central banks [Are Phillips curves useful for forecasting inflation?]," Oxford Economic Papers, Oxford University Press, vol. 74(3), pages 671-700.
    6. Yunjong Eo & Luis Uzeda & Benjamin Wong, 2023. "Understanding trend inflation through the lens of the goods and services sectors," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(5), pages 751-766, August.
    7. Aydin Yakut, Dilan, 2025. "Beyond Aggregates: A Dual Lens on Eurozone Trend Inflation," Research Technical Papers 3/RT/25, Central Bank of Ireland.
    8. James M. Nason & Gregor W. Smith, 2021. "UK inflation forecasts since the thirteenth century," CAMA Working Papers 2021-32, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    9. Garcia, Juan Angel & Gimeno, Ricardo, 2024. "Navigating high inflation: A joint analysis of inflation dynamics and long-term inflation expectations in Latin America," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 5(4).
    10. Carlomagno, Guillermo & Fornero, Jorge & Sansone, Andrés, 2023. "A proposal for constructing and evaluating core inflation measures," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 4(3).
    11. Chen, Ji & Yang, Xinglin & Liu, Xiliang, 2022. "Learning, disagreement and inflation forecasting," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).
    12. Drew Creal & Siem Jan Koopman & Eric Zivot, 2008. "The Effect of the Great Moderation on the U.S. Business Cycle in a Time-varying Multivariate Trend-cycle Model," Tinbergen Institute Discussion Papers 08-069/4, Tinbergen Institute.
    13. Jonas D. M. Fisher & Leonardo Melosi & Sebastian Rast, 2025. "Long-Run Inflation Expectations," Working Paper Series WP 2025-03, Federal Reserve Bank of Chicago.
    14. Kelly Trinh & Bo Zhang & Chenghan Hou, 2025. "Macroeconomic real‐time forecasts of univariate models with flexible error structures," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 44(1), pages 59-78, January.
    15. Andrea Carriero & Francesco Corsello & Massimiliano Marcellino, 2022. "The global component of inflation volatility," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 37(4), pages 700-721, June.
    16. Gael M. Martin & David T. Frazier & Ruben Loaiza-Maya & Florian Huber & Gary Koop & John Maheu & Didier Nibbering & Anastasios Panagiotelis, 2023. "Bayesian Forecasting in the 21st Century: A Modern Review," Monash Econometrics and Business Statistics Working Papers 1/23, Monash University, Department of Econometrics and Business Statistics.
    17. McNeil, James, 2023. "Monetary policy and the term structure of inflation expectations with information frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 146(C).
    18. Fu, Bowen & Mendieta-Munoz, Ivan, 2025. "Trend inflation and structural shocks," EconStor Preprints 308793, ZBW - Leibniz Information Centre for Economics.
    19. Bowen Fu, Ivan Mendieta-Muñoz, 2023. "Structural shocks and trend inflation," Working Paper Series, Department of Economics, University of Utah 2023_04, University of Utah, Department of Economics.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C39 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Other

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pri:econom:2019-30. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bobray Bordelon (email available below). General contact details of provider: https://edirc.repec.org/data/deprius.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.