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Economy in Brief

Inflation Continues to Flare in Italy
by Robert Brusca  January 5, 2022

There is nothing in the headline or core evolution of Italy's inflation numbers this month that provokes any respite or reason to think that the worst from inflation is over. And on world markets, oil prices are moving higher giving no reason to look there for good news.

As the chart shows, both the Italian CPI and the HICP measures are flaring sharply. The HICP slowed to gain just 0.4% in December after rising 0.8% month-to-month for two months in a row. The core HICP gained 0.5% in December, accelerating from a 0.3% November rise and equaling a 0.5% October gain.

The Italian domestic index (as opposed to the EMU's HICP index) rose by only 0.2% in December, slowing from 0.9% in November and 0.7% in October. The core domestic measure rose by 0.4% in December, accelerating from 0.3% gains in each of the previous two months.

Headline inflation leads
Core inflation is running below the pace of headline inflation as oil and energy prices lead the way higher for inflation. But the two headline measures are up over three months in the range of 7% to 7.8% while the core measures are up in the range of 3.9% to 5.1%. All these rates of change are excessive with respect to the overarching 2% target on average now aimed at by ECB policy. And until recently, Italy has been one of the low inflation countries in the EMU.

Diffusion narrows...but
Digging deeper into the numbers, we can unearth some good news but I'm still not sure how deep it goes. For example, over three months, Italy's inflation diffusion is only 50% (that means inflation is rising in as many categories as it is falling); this is down sharply from a diffusion reading of 75% over six months and from 58.3% over 12 months. Of course, saying that inflation is neither accelerating nor decelerating when its three-month pace is in the 7% to 8% range is not such a great accomplishment.

However, if we look at the median inflation gain for the 12 CPI components in the table, the annualized median for three-months is 1.5%, for six-months it is 1.2%, and for 12-months it is 0.7%. So, there is some acceleration in that pattern, but since these already are annualized rates the medians show inflation coming in under the radar. But these medians were selected on annualized gains and without regard to the size of the category so the pace for headline inflation is much stronger and has accelerated even more; the same is true for core inflation. Those facts push these metrics to a back-row seat. They still get their say, but not a very loud voice.

Monthly trends
Monthly inflation in December, November and October had a median value of 0.1% across the 12-categories (not annualized). The headline flared sharply while the core continued to cruise at a too-fast speed. In December, only transportations showed a month-to-month price decline, but education, health care and clothing & footwear prices showed flat results on the month. In November, two categories showed declines: 1) housing & furniture and 2) communication. Also, recreation & culture prices were flat. Education & communication prices fell in October with the catch-all ‘other' category flat in October. These results show that inflation is not exploding everywhere and finds some hope that when the primary stimulus for inflation lessens inflation elsewhere might dip. However, what we cannot know from these data is the extent to which people/workers feel they have lost ground in their compensation and will seek to address that in coming months possibly putting a wage-price spiral into effect and sustaining the inflation pulse.

Sequential trends
Over three months, inflation decelerated in six categories and prices fell in two categories. Over six months, inflation slowed in three categories and prices fell in two categories. Over 12 months, inflation slowed in five categories compared to 12-months ago and prices were lower year-on-year in two categories.

Inflation in Q4
However, in the just completed quarter (see QTD column), headline inflation runs at a 6.2% to 6.5% pace with the core at 3.1% to 3.3%. The median annualized rate of change in the quarter is 1.7%. Communications and education prices are lower on balance in the quarter. Rent & utilities prices and transportation prices are both up at double-digit pace of 14% or more (annualized).

Italy has seen a sharp tick up in infections as December ended. However, the daily death curve has picked up only very moderately in response. Both infections and recoveries are rising, but infections are rising much faster. Omicron once again reveals itself as a different animal: highly contagious but not as dangerous.

It is hard to tell about the virus’ prospects since the Omicron variant has been so transmissible and yet has been much less impactful on people’s health. We will have to watch developments in Italy and Europe closely to see how growth and policy moves are affected. In France, President Emmanuel Macron is talking much more aggressively about trying to convince more to vaccinate even though vaccination does not stop the infection and transmission cycle. The future will depend significantly on how the virus spreads as well as on peoples’ attitudes toward it. In the U.S., market reactions seem to show a lot less fear of any economic damage that Omicron might do. This is something to keep an eye on since perceptions can shift. But so far, it is only China that continues to act in a draconian fashion shutting all borders and locking down cities in a quest for zero Covid that looks impossible to achieve given the easy transmissibility of Omicron and its often-symptomless guise.

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