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Economy in Brief

Italian Prices Fall in April
by Robert Brusca  May 17, 2022

Italian inflation as measured by the HICP fell as the price index itself by 0.2% in April and the Italian domestic CPI index also fell by 0.3%. Declines in the price indices are quite unusual. Currently, when there is substantial inflation pressure in the US, in the UK, around Europe, and in the trend for inflation in Italy itself, such a decline comes ‘out of the blue.’ It has been 23 months since both headline measures of inflation for Italy fell in the same month.

The chart demonstrates that inflation in Italy has generally been better contained than inflation in Germany for some time. This, of course, is a situation that would have been unheard of before the European Monetary Union had been formed and would have been unheard of even in the early days of the Monetary Union. But things have changed, Italian inflation tends to be more contained, and Germany right now does have an inflation problem of its own.

Italian inflation does not have a clear trend in either one of the headline metrics; both show an inflation rate that rises over 6-months compared to 12-months and then falls over 3-months compared to 6-months. In both cases, for the HICP and for the CPI, the 3-month inflation rate remains higher than the 12-month inflation rate. It's too soon to say that there's deceleration in place although having these price declines in the same month is a hopeful sign. Still, nothing about the dynamics for inflation has shifted. The global economy is still growing, energy prices are still high and potentially still rising, there is the potential for energy price disruptions in Europe, the war between Russia and Ukraine continues, and this will exacerbate supply chain problems for any multinational company.

Among the 12 CPI categories in April inflation fell in five of them and was unchanged in one category. That's certainly good news on inflation breadth. However, it marks a sharp drop from March when only two categories showed month-to-month price drops and from February when there was only one small price drop. It is hard to argue that this is a new trend. For now, it is an ‘event.’

Over three months, the inflation rate is rising in 58% of the CPI categories, that compares to rising in 66% of the categories over 6-months and in over 75% of them over 12-months. The breadth of inflation has indeed narrowed and that's a good sign even though the inflation rate itself has not clearly moved lower over these sequential periods.

The April report puts Italy in the first month of a new quarter. Looking at inflation annualized in this new quarter compared to the first quarter, inflation appears to have slowed. This is obviously an artifact of this step back for inflation rates in April itself and it's too early in the quarter to make anything of this as a trend. Early in this quarter-to-date there are only three CPI categories in which prices are falling compared to their first quarter values.

Italian core inflation is lower than the headline with the HICP rate moving from 2.6% over 12-months to 3.5% over 6-months and 3-months, demonstrating that, moving away from the headline into the core - and probably to more sustainable trends- inflation is still accelerating. The domestic core measure shows inflation rising from 2.3% over 12 months to a 3.1% pace over 6-months, then higher at a 3.5% pace over 3-months. That puts the HICP and the domestic core indices at the same rate of expansion over 3-months and it shows a steadier acceleration in the domestic measure for inflation than for the HICP measure.

Core measures are less volatile than headline measures and therefore better-represent the trend for inflation. If that remains true, then Italian inflation is still building steam and not backing off as the headline suggests. Obviously, the factors that generate inflation are still operating and should be construed as risk factors. The inflation fundamentals for Italy and for Europe have not turned around in any way. However, there is still hope that the special factors that have accelerated inflation are going to start to let up on their own and will create some deceleration.

The ECB has yet to take steps to use monetary policy to knock the inflation rate down and, of course, there has been no anti-inflation or growth-impeding fiscal action. Lacking overt action to knock the inflation rate down, it's likely that the core rate is giving us the correct signal and that the inflation that is still present in all likelihood is still accelerating – but perhaps with less vigor... However, for the month, the headline inflation rate falls and that is encouraging. Maybe it suggests that the exogenous factors that are beyond the purview of fiscal policy and monetary policy are losing some of their steam. But that is not to deny that monetary policy action will be needed or even to suggest that it can be delayed.

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