Prices have been reacting to the economic cycle at an unusually slow pace in the main euro-area countries for some years. One explanation could be that the standard measurements of resource underutilization are proving insufficiently representative in the present cyclical situation. By relying on a large number of variables, this paper develops synthetic indicators for labour and financial markets, and then evaluates their predictive content for core inflation dynamics in Italy over the period 2012-17.
The paper shows that using synthetic labour market indicators and to a lesser extent, financial market indicators, provides a more accurate forecast of Italy's core inflation with respect to predictions based on standard measurements of slack such as the output gap and the unemployment gap; these would produce core inflation forecasts that are significantly and systematically higher than the actual values observed between 2012 and 2017.
Published in 2021 in: Economic Modelling, v. 96, 1, pp. 172-195.
