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A New Method for Measuring Underlying Inflation in Türkiye

Author

Listed:
  • Merve Capan
  • Ahmet Gulveren
  • Tuba Ozsevinc

Abstract

In this study, we propose a trend inflation indicator by using the Multivariate Unobserved-Components Stochastic Volatility Outlier-Adjusted (MUCSVO) model to better capture the underlying inflation dynamics in Türkiye. Our measure effectively filters out temporary shocks and exhibits superior forecasting performance at horizons beyond three months. Moreover, results imply that the permanent component of inflation declined from 3.9 in October 2023 to 2.2 in June 2025. Services emerge as the dominant driver of trend inflation, contributing about 55% despite having only 31% of the consumption basket weight. These results highlight the importance of sectoral decomposition in understanding inflation persistence and improving monetary policy design. As an addition to the underlying trend inflation indicators currently monitored by the Central Bank of the Republic of Türkiye (CBRT), the MUCSVO model enhances the CBRT’s capacity to monitor underlying price dynamics.

Suggested Citation

  • Merve Capan & Ahmet Gulveren & Tuba Ozsevinc, 2026. "A New Method for Measuring Underlying Inflation in Türkiye," Working Papers 2605, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    • Handle: RePEc:tcb:wpaper:2605
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    File URL: https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Publications/Research/Working+Paperss/2026/26-05
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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