Abstract: Current and prospective inflation matters a lot to monetary policy makers and market participants. This paper develops a new underlying inflation gauge for China (CUIG) which differentiates between trend and noise, is available daily and uses a broad set of variables that potentially influence inflation. Its construction follows the works at other major central banks and adopts the methodology of a dynamic factor model developed by Forni et al. (2000). Our UIG for China is less noisy but still closely tracks the headline CPI. It does not suffer from the excess volatility reduction that plagues traditional core inflation measures and instead provides additional information. Finally, when forecasting the headline CPI, our UIG for China outperforms traditional core measures over different samples.

Full report ：Developing an underlying inflation gauge for China.pdf