This paper introduces a new decomposition of euro area headline inflation into core, cyclical, and residual components. Our new core inflation measure, the structural core inflation rate, is the expected headline inflation, conditional to medium to long-term demand and supply-side developments. It shows smoothness and trending properties, economic content, and forecasting ability for headline inflation and other available core inflation measures routinely used at the ECB for internal or external communication. Hence, it carries additional helpful information for policy-making decisions. Concerning recent developments, all the inflation components contributed to its post-pandemic upsurge. Since mid-2021, core inflation has been downward, landing at about 3% in 2022. Cyclical and residual inflation-associated with idiosyncratic supply chains, energy markets, and geopolitical tensions- are currently the major threats to price stability. While some cyclical stabilization is ongoing, a stagflation scenario cum weakening overall financial conditions might emerge. A pressing issue for ECB monetary policy will be to face -mostly supply-side- inflationary pressure without triggering a financial crisis.

Morana, C. (2023). Euro area inflation and a new measure of core inflation. RESEARCH IN GLOBALIZATION, 7(December 2023) [10.1016/j.resglo.2023.100159].

Euro area inflation and a new measure of core inflation

Morana, C
2023

Abstract

This paper introduces a new decomposition of euro area headline inflation into core, cyclical, and residual components. Our new core inflation measure, the structural core inflation rate, is the expected headline inflation, conditional to medium to long-term demand and supply-side developments. It shows smoothness and trending properties, economic content, and forecasting ability for headline inflation and other available core inflation measures routinely used at the ECB for internal or external communication. Hence, it carries additional helpful information for policy-making decisions. Concerning recent developments, all the inflation components contributed to its post-pandemic upsurge. Since mid-2021, core inflation has been downward, landing at about 3% in 2022. Cyclical and residual inflation-associated with idiosyncratic supply chains, energy markets, and geopolitical tensions- are currently the major threats to price stability. While some cyclical stabilization is ongoing, a stagflation scenario cum weakening overall financial conditions might emerge. A pressing issue for ECB monetary policy will be to face -mostly supply-side- inflationary pressure without triggering a financial crisis.
Articolo in rivista - Articolo scientifico
Core inflation; COVID-19 pandemic; Dot-com bubble; ECB monetary policy; Euro area; Headline inflation; Russia's war in Ukraine; Sovereign debt crisis; Subprime financial crisis; Trend-cycle decomposition;
English
18-ott-2023
2023
7
December 2023
100159
open
Morana, C. (2023). Euro area inflation and a new measure of core inflation. RESEARCH IN GLOBALIZATION, 7(December 2023) [10.1016/j.resglo.2023.100159].
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10281/450318
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