The aim of this paper is to build a tool for performing forecasting
exercises, allowing to obtain a reliable estimate of Italian consumer price
inflation. To reach this goal we estimate a simple three-equation model for
the short term forecasting of twelve-month percentage variations of the
Italian consumer price index. The starting point of the model is the
decomposition of the general index in a main component, the so-called core
inflation, capturing longer term tendencies and two additional volatile
components, those of unprocessed food and energy prices. The idea is that
it is exactly core inflation which is possible to explain and forecast with a set
of basic economic variables acting as leading indicators.
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