This paper presents a new synthetic indicator of underlying inflation (Underlying Composite Inflation, UCI), estimated using an econometric model that captures the persistent component of consumer inflation, filtering out short-term volatility and idiosyncratic factors. The methodology is applied to both the euro area as a whole and to its four largest countries. The paper analyses the predictive ability of the indicator with respect to the evolution of consumer inflation.
Empirical analysis shows that the UCI provides a more stable and accurate signal of the underlying dynamics of inflation and has a better forecasting ability than the indicators commonly used in the Eurosystem. It can be usefully employed in the assessment of inflation risks for monetary policy purposes.
