Evaluating the Underlying Inflation Measures for Russia

Underlying inflation indicators can be useful for the monetary policy of the inflation targeting central bank when inflation indicators help separate a change in relative prices from true inflation, as well as when they allow assessing medium-term inflation risks. We apply various methods frequently used in practice to calculate 20 underlying inflation indicators for Russia in the pseudo-real time. We apply three types of tests to these measuring instruments: tests for economic content and the ability to forecast future inflation, as well as a set of technical tests. We find that inflation indicators cal-culated on the basis of dynamic factor models emerge as the best performing candidates. The dynamics of the ob-tained range of underlying inflation measures in 2014 compared with headline inflation indicates that the accelerated growth in consumer prices was not fully reflected in underlying inflation dynamics.