Factor decomposition of disaggregate inflation: the case of Greece

Abstract

We use static and dynamic factor models to decompose Greek inflation into common components. Static factor analysis suggests the need to develop comprehensive underlying inflation measures for Greece. Dynamic factor analysis decomposes inflation into three components: pure inflation and relative price inflation both driven by aggregate shocks and, an idiosyncratic component reflecting sector specific shocks. We verify the idiosyncratic component as the main source of inflation variability while pure inflation and its associated shocks are dominant compared to relative inflation. Based on pure inflation correlations, the relative weight of anticipated monetary shocks is large only for the spread between the ten-year government bond yield and a three-month short run rate and only in times of monetary stability.