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Title: On core inflation indicators: Evidence from the European Union countries Authors:  Aleksandra Halka - Narodowy Bank Polski (Poland) [presenting]
Grzegorz Szafranski - National Bank of Poland and University of Lodz (Poland)
Abstract: The aim is to decompose the consumer inflation in EU economies into permanent and transitory component to check if selected core inflation measures the underlying trend. In the decomposition we follow a recent method. Second, to address the question of the core inflation role as a demand indicator we construct regressions motivated by the Philips curve. Third, we check the forecasting performance of the selected measure using a previous method. Finally, to summarize the results we propose a synthetic measure Core Inflation Score which evaluates different measures in a simple and comprehensive way. The main results are: Although the energy and unprocessed food prices are volatile they also include part of the permanent component of the inflation. Therefore, the measure that excludes these sub-indices (XUFE) is not the best approximation of the underlying inflation. Despite that the most of the economists argues that the core inflation measures should reflect the trend inflation we also find a positive correlation between XUFE and output gap for some countries. Moreover, for higher number of countries XUFE is approximation of the demand pressure than of the trend inflation. In forecasting future developments of the HICP index in the short term the permanent HICP component may be a better and less biased predictor of the future inflation. At the same time for the longer horizons the permanent XUFE component is better.