  The aim of this paper is to investigate the use of the Factor Analysis in
order to identify the role of the relevant macroeconomic variables in driving
the inflation. The Macroeconomic predictors that usually affect the inflation
are summarized using a small number of factors constructed by the principal
components. This allows us to identify the crucial role of money growth,
inflation expectation and exchange rate in driving the inflation. Then we use
this factors to build econometric models to forecast inflation. Specifically,
we use univariate and multivariate models such as classical autoregressive,
Factor models and FAVAR models. Results of forecasting suggest that models
which incorporate more economic information outperform the benchmark.
Furthermore, causality test and impulse response are performed in order to
examine the short-run dynamics of inflation to shocks in the principal factors.
