Abstract
We propose a novel tool to gauge price pressures resorting to circular statistics, the inflation compass. It offers a reliable indication of inflationary pressures in the euro area since its inception. Unlike most alternative measures of underlying inflation, the inflation compass does not exclude any inflation subitems. Moreover, it is not revised, providing real-time signals about the course of underlying inflation. We also provide evidence of the usefulness of the inflation compass to forecast overall inflation, even during periods of increased turbulence, such as the COVID-19 pandemic or the recent inflation surge. Lastly, our approach can handle large-dimensional data straightforwardly.
Authors
- Nuno Lourenço
- João Quelhas
- António Rua
JEL codes
- C53
- C55
- E31
- E37