ALICE: Composite leading indicators for euro area inflation cycles

This paper develops Area-wide Leading Inflation CyclE (ALICE) indicators with the aim to provide early signals for turning points in the euro area headline and core inflation cycles. The headline (core) ALICE leads the reference cycle by three (four) months and the lead times extend to five (nine) months based on longer-leading series. Both ALICE indicators signalled turning points in the inflation cycles ex post and also performed well in a simulated real-time exercise. Moreover, in particular the headline ALICE also appeared to be useful for quantitative forecasting of the direction and level of inflation. (C) 2020 International Institute of Forecasters. Published by Elsevier B.V. All rights reserved.

Automated summary

This paper introduces Area-wide Leading Inflation CyclE (ALICE) indicators to provide early signals for turning points in the euro area inflation cycles. Both the headline and core ALICE indicators have shown to be effective in signaling turning points in inflation cycles and are useful for quantitative forecasting.