The monitoring of inflation is a common practice among central banks worldwide due to its relevance in monetary policy decisions. Therefore, it is useful to look at measures of underlying inflation to anticipate changes or rapid reversals in the observed inflation movements.

In this context, an instrument based on circular statistics has been developed, the so-called inflation compass. It allows for inferring underlying inflationary pressures in the euro area in real time, using all available information regarding the harmonized index of consumer prices. By moving in the counterclockwise direction, the inflation compass synthesises the different underlying inflationary pressures in the consumer basket into a single direction (represented by the red needle), with the confidence interval associated with the mean direction represented as an arc around it. Thus, when the needle points North (towards 90°), there is evidence that underlying inflationary pressures may have reached a local maximum. The reading of this new instrument suggests that the peak of inflation in the euro area was reached at the end of last year, with the red needle moving along the first quadrant from East to North and reaching the direction of 90° in November.

For more details see Lourenço, N., Quelhas, J. and Rua, A. (2023), “Navigating with a compass: Charting the course of underlying inflation”, Banco de Portugal Working Paper No. 17.

Prepared by António Rua, João Quelhas and Nuno Lourenço. The analyses, opinions and findings expressed above represent the views of the authors and not necessarily those of Banco de Portugal or Eurosystem.