A Composite Index of Inflation Tendencies in the Euro Area

19 Pages Posted: 21 Oct 2017

Date Written: September 11, 2017

Abstract

Assessing underlying inflation developments is crucial for a correct calibration of the monetary policy stance. To monitor the adjustment in the path of euro area inflation towards the ECB’s definition of price stability, we select a number of indicators of price dynamics in the area. We then construct a composite index summarizing the information contained in those indicators by estimating several univariate probability models. The index, which provides a synthetic measure of inflationary pressures net of the most volatile components, can be interpreted as gauging the probability of inflation returning to 1.9 per cent or over within a given time horizon. Our findings, which are based on the information available in July 2017, signal that, despite the improvement in price dynamics since the beginning of the year, the adjustment of inflation rates towards levels below, but close to, 2 per cent over the medium term is still limited and far from being sustained.

Keywords: euro area, determinants of inflation, inflation, statistical aggregation

JEL Classification: C35, C38, E31, E58

Suggested Citation

Miccoli, Marcello and Riggi, Marianna and Rodano, Maria Lisa and Sigalotti, Laura, A Composite Index of Inflation Tendencies in the Euro Area (September 11, 2017). Bank of Italy Occasional Paper No. 395, Available at SSRN: https://ssrn.com/abstract=3056283 or http://dx.doi.org/10.2139/ssrn.3056283

Marcello Miccoli (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Marianna Riggi

Bank of Italy

Via Nazionale 91
00184 Roma
Italy

Maria Lisa Rodano

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Laura Sigalotti

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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