This paper proposes a conceptual framework to estimate inflation volatility assuming rational inattention and introduces a new inflation risk measure: the directional volatility ratio. We estimate inflation trends and volatility in Germany, France, Spain, the Eurozone, and the USA from January 2002 to July 2023. Our volatility measure outperforms standard inflation volatility forecasting methodologies and relates to subjective inflation volatility. The directional volatility ratio significantly relates to the inflation trend dynamics, foreseeing likely inflation trends and turning points. We recommend using inflation total and directional volatility to monitor and forecast inflation trend dynamics.

Other authors: Alfredo García-Hiernaux and David E. Guerrero.