A New Method for Measuring Underlying Inflation in Türkiye
| Title: |
A New Method for Measuring Underlying Inflation in Türkiye |
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Number: |
26/05 |
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Author(s): |
Merve Çapan, Ahmet Gülveren, Tuba Özsevinç |
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Language: |
English |
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Date: |
February 2026 |
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Abstract: |
In this study, we propose a trend inflation indicator by using the Multivariate Unobserved-Components Stochastic Volatility Outlier-Adjusted (MUCSVO) model to better capture the underlying inflation dynamics in Türkiye. Our measure effectively filters out temporary shocks and exhibits superior forecasting performance at horizons beyond three months. Moreover, results imply that the permanent component of inflation declined from 3.9 in October 2023 to 2.2 in June 2025. Services emerge as the dominant driver of trend inflation, contributing about 55% despite having only 31% of the consumption basket weight. These results highlight the importance of sectoral decomposition in understanding inflation persistence and improving monetary policy design. As an addition to the underlying trend inflation indicators currently monitored by the Central Bank of the Republic of Türkiye (CBRT), the MUCSVO model enhances the CBRT’s capacity to monitor underlying price dynamics. |
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Keywords: |
Unobserved component models, Trend inflation, Inflation forecasting, Monetary policy design |
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JEL Codes: |
C32; E31; E37; E52 |
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