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Economy in Brief

Italian Inflation Continues to Head for the Moon
by Robert Brusca  March 16, 2022

Italy's inflation rate remains high and continues to show acceleration in February. The inflation gauge as measured by the HICP shows Italian prices up 1.3% in February, slightly less than the 1.5% they grew in January, but still a very high increase month-to-month. The HICP core gain was 0.9% in February, up from 0.5% in January. Italy’s domestic inflation measures continue to show heat as well.

Inflation accelerates broadly
The sequential inflation rates for Italy show the headline rate going from a 6.1% pace over 12 months to a 9.5% annual rate over six months to a 13.8% annual rate over three months. For the core rate, that progression is 1.8% over 12 months, 4.1% over six months and 6.3% over three months. Both headline and core measures of inflation show acceleration. Prices remain hot monthly across the board. Not only is Italian inflation high and accelerating but the diffusion characteristics of inflation reinforce the notion that inflation is accelerating and broad. The diffusion index for three-month inflation is at 75%, for six-months it's at 75% and for 12 months it's at 58.3%. A diffusion reading at 50% implies that inflation acceleration and deceleration for the period are balanced across various CPI line-items. At 75%, the diffusion index is showing inflation is greatly tilted toward acceleration and we see that condition over three months and six months as well as a sizable tilt toward more inflation acceleration over 12 months.

Monthly trends
Looking at monthly data the inflation rate across the various domestic components, we find it increased in all but two of them in February- that's an acceleration in all but two out of 12 components. Similarly, inflation increased month-to-month in January for all components except 2 and the same was true in December. The monthly data reinforce what we see in the sequential data: they show that inflation is accelerating period-to-period whether it's 12-months to six-months to three-months or December to January to February.

On a quarter-to-date basis- this is with two months of data in for the first quarter- inflation is rising at a 13.6% annual rate for the headline HICP and at a 5.4% annual rate for the core. The domestic measure shows headline inflation at an 11.5% pace with the core at a 3% pace. The domestic measures are slightly less hot than the HICP measures employed by the ECB.

Despite the high inflation levels in Italy, Italian inflation has generally been tracking below German inflation in recent years. Italy went through a period of austerity and was able to gain control of its inflation rate. But now inflation seems to permeate the economy and Italy has a clear inflation fight on its hands. Increases in global energy costs are going to continue to weigh on Italy, a country that is dependent on imported energy. The ECB will be raising interest rates to try to fight off these inflation effects as the year goes on, but inflation in Italy appears to be high, entrenched, and broad so the economy is going to have a lot of work ahead of it to put this inflation back down inside parameters that are acceptable from an EMU-wide targeting standpoint of around 2%.

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