Euro area price pressures remain muted from different perspectives

The most popular ex-type measure of underlying inflation is the one traditionally referred to as "Eurostat" core inflation, which excludes energy, food, alcohol and tobacco prices. Given its recent increased volatility, which is not ideal for a measure that aims to track movements in trend inflation, we have constructed our own core inflation measure with the aim of having a more stable identifier of not only underlying pressures but also quick second round effects related to oil price swings.

Barclays says, while being aware that the perfect measure of core inflation does not exist, core inflation measure is created with two following objectives in mind:
 

• 1. To reduce volatility of Eurostat core inflation by excluding not only energy, alcohol and tobacco prices, but also transport by air, transport by sea/inland waterway and package holiday prices. The reason to exclude these services prices is that they have become extremely volatile due to regulation measures associated with the treatment of seasonal prices within these items, added Barclays. They are also less indicative of coincident price pressures stemming from domestic demand and wages, given the increased lag between actual purchase of the services and it being recorded within the HICP basket. 
   
• 2. To create a core measure with higher sensitivity to oil prices swings than the Eurostat measure without reintroducing volatility via the back door. To do so, processed food prices also included in the Barclays core measure given their limited monthly inflation rate volatility despite their high correlation with euro-denominated oil prices swings possibly due to the impact that oil prices have on packaging costs, which are traditionally higher for processed than for unprocessed food items.