Inflation lower in Italy than rest of Europe

Rome: Italy’s inflation rate rose to 1.3% in March compared to a year ago, albeit at a slower pace than anticipated.

There’s perhaps no better example of a ‘soft landing’ than the current state of the Italian economy.

While Italy’s economic activity has significantly decelerated from the elevated post-pandemic growth rates observed in 2021 and 2022, it has done so just enough to effectively ease inflation without triggering a recession.

Essentially, it has achieved a delicate balance, something central bankers have long aimed for when dealing with high price pressures.

Italy’s annual consumer inflation rate came in at 1.3% in March 2024, as per preliminary data released by Istat, the country’s statistical office.

This figure represents an increase from the previous rate of 0.8%, albeit at a slower pace than the expected 1.4%. Monthly inflation also saw a modest increase of 0.1%, falling short of the anticipated 0.2%.

This slight inflation uptick can be attributed to the easing decline in energy prices (-10.8% in March compared to -17.3% in February) and the acceleration of prices for transportation services (4.4% compared to 3.8%).

Conversely, prices of unprocessed food products slowed down in March (+2.6% compared to +4.4%). The annual dynamics of “shopping trolley” prices also showed a decrease (+3.0%), while core inflation stands at +2.4% (a modest increase from +2.3%).

Italy’s annual inflation rate has dropped by more than 10 percentage points since reaching a four-decade high in October 2022, when it peaked at 11.8%, and remains well below the euro area average, which was at 2.6% in February 2024 and is expected to marginally ease to 2.5% in March.

Aside from improvements in supply-side factors impacting inflation, such as the significant decline in energy prices, Italy’s inflationary pressures have also subsided due to demand-side influences.

Fundamentally, monetary policy has effectively influenced the Italian economy in recent years.

The heightened interest rates set by the European Central Bank have dissuaded both firms and households from taking on loans, thereby cooling the economy and effectively tempering inflation.

Aggregate loans to Italian households and businesses remain in contraction territory, and decreased further by -2.6% in January and -2.7% in February, as per the latest data from the Italian Banking Association (ABI).

According to the latest forecasts from the European Commission, Italy’s inflation is projected to be 2.0% in 2024 and 2.3% in 2025, driven by an anticipated increase in wages, particularly in the public sector.

“Inflation is projected to remain considerably lower than the Eurozone average,” Paolo Mameli, an economist at Banca IMI, said.

The analyst explained that core inflation in Italy has consistently lagged behind the euro area average for the past two years, a pattern expected to continue due to a restrained wage growth trajectory.

In general, he foresees headline inflation in Italy to slightly rise over the year, remaining closely tethered to the 2% threshold on average in both 2024 and 2025.

Of utmost significance is that the reduction in Italian inflation hasn’t been paralleled by an economic downturn or a deterioration in employment conditions.

In February 2024, surveys conducted by the Purchasing Managers’ Index (PMI) on the activity within Italy’s services sector showed indications of expansion, marking the highest growth level observed in eight months.

Dr Tariq Kamal Chaudhry, economist at Hamburg Commercial Bank, has noted the resilience of the Italian services sector, emphasising “steady growth” in new orders and a “gentle push” from overseas, leading to a “robust employment situation.”

The latest labour market data shows that Italy’s unemployment rate hit a 16-year low at 7.2% in January 2024.

Eleanor Dennison, economist at S&P Global Market Intelligence, highlighted the improved sentiment among Italian private sector firms, with more positive forecasts for “investment, employment, and profit,” across various industries.

Bert Colijn, Eurozone senior economist at ING, pointed out the slower export growth in Germany and the Netherlands compared to Spain, Portugal, Greece, and Italy while expressing optimism for industrial companies in the southern European countries.

All told, Italy has smoothly navigated a successful soft landing, effectively handling moderated growth and controlling inflation. Moving forward, it will be crucial to monitor the effects of potential interest rate cuts later this year and how the global economy performs on Italy’s inflation patterns.