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Italy inflation rate: Price rises slow in December in sign Europe may be past its peak

By Ryan Hogg

Edited by Jekaterina Drozdovica


Updated

Italian flag
Italy's year-on-yaer inflation rate slowed to 11.6% in December 2022 – Photo: Philipp Dase / Shutterstock

Italy is fighting historic levels of inflation as its economy continues to battle the fallout of Russia’s invasion of Ukraine and the unwinding of Covid-19 restrictions.

With the election of a far-right leader adding more uncertainty to Italy’s economic direction, are prices likely to come down soon? What is the outlook for the Italy inflation rate in the coming years?

What is inflation? 

Inflation measures the increase in the prices of a basket of goods and services in the economy, usually tracked over a 12-month period. It is a weighted average of a selection of goods and services as decided by statisticians, based on what is most in demand among citizens. 

Energy and food carry strong weight in the basket, and are often highly volatile. This means policymakers sometimes look at core inflation, which strips out those variables, to get an idea of underlying price pressures. 

Inflation is the main target used by most central banks, who tend to favour a target of 2% inflation, which represents slow and stable price rises. This is picked because low levels of inflation engender confidence in stable markets, encouraging customers to buy products without upsetting demand and supply functions. Indeed, negative inflation, or deflation, can hurt economic growth in part by reducing the incentive for consumers to spend in the present.

High levels of inflation are problematic because high prices can quickly become endemic. Higher input prices can continue to put up firms’ costs, while inflation also increases demands from workers for higher wages to prevent a real-terms pay cut, something which could induce a wage-price spiral.

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Italy inflation rate: Brief history

Italy’s inflation rate history, like much of the West, has enjoyed a long period of stability in the 21st century as the advent of central bank independence and cheap costs driven by globalisation created a new era of low-price growth. Inflation was frequently below the bank’s target of 2% over the last 20 years.

Italy's Inflation Rate, 1999-2023But prices have skyrocketed in 2022 to four-decade highs, and the highest rate since the country joined the eurozone, off the back of unwinding supply chains following the Covid-19 pandemic and Russia’s invasion of Ukraine, which has cut off vast swathes of energy supply and put up prices for households and businesses.

The current inflation rate in Italy, as measured by the consumer prices index (CPI), was 11.6% in the year to December (down from 11.8% in the previous month), according to data from Italy's National Institute of Statistics, ISTAT. The reading came in 2.4% higher than in the euro area – inflation in the currency bloc fell for a second month to 9.2% (as measured by Eurostat), well below expectations of 9.7%, and ramped up hopes that the European Central Bank (ECB) may not have to hike rates as aggressively as pledged. 

The country’s core inflation rate was 3.8% (up from 0.8% in 2021), suggesting a big disconnect between fuel and food prices and other goods and services, which could be encouraging for the country’s economy moving forward. 

Unsurprisingly, the effects have filtered through to the country’s stock index, IT40. The benchmark has lost close to 9% of its value over the past year as of 9 January – however, it appears to be mounting a comeback, posting gains of over 20% over the past three months. 

The index extended early gains and closed 1.4% higher at 25,180 on 5 January, notching a 6% surge to its highest level in nine months as Italy’s highly rate-sensitive and heavily-indebted economy strongly benefited from the cooler-than-expected CPI reading in the eurozone. 

FTSE Italy 40 (IT40) price

What is driving the inflation rate in Italy right now?

The bulk of the price rises in Italy are being caused by elevated fuel and food costs – both of which appear to have slowed recently. The Italian bank UniCredit wrote in September:

“Italian businesses and families, grappling with the staggering increase in energy and raw material costs, are facing an economic crisis with uncertain implications and timing.”

In a note issued on 5 December, ING senior economist Paolo Pizzoli pointed to the effect of a slowdown in energy prices – particularly natural gas – caused by abnormally warm winter weather across Europe. He said: 

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“Over the first quarter of 2023, weather conditions will play a key role in determining the scope of the deceleration in the energy component of the CPI basket. The recent decline in TTF gas prices to the €60/MWh area reflects the combination of abnormally mild winter weather and of related softer gas demand, and is extending to future contracts maturing over 2023. If confirmed, it could bring about a sharp deceleration in the energy inflation component over the next few months. The unusually high level of gas storage filling at this time of the year (at 82% vs a 73.8% average during the pre-Covid 2017-19 period in the same days of the year) encourages some short-term optimism.

All in all, today’s data suggest that the peak in headline inflation might have passed. The pace of the decline in headline inflation will depend on how the energy and the core components will balance out. We still believe that the core measure has some room for further increases: the energy pass-through is not over yet, and wage increases, so far scarcely perceptible, might become more visible over the course of 2023. However, a favourable base effect should increasingly push down the energy component.

After today’s release, the statistical carryover for 2023 average headline inflation is 5.1%. We forecast average CPI inflation at 6.6% in 2023.”

Wages have been fairly stagnant in Italy in recent years, suggesting a wage-price spiral isn’t in the offing. 

These included worsening geopolitical relations between the West and Russia and China and stubbornly elevated commodity prices.

There is political uncertainty. The far-right Brothers of Italy party’s Giorgia Meloni won the most votes at the latest Italian election in September. 

It’s not clear exactly how the election could affect Italy's inflation rate. The party supports the centre-right coalition’s suggestion that the next government should cut sales taxes on certain goods to alleviate the cost-of-living crisis, as reported by CNBC, a move that could drive more demand and push up prices. 

Economicsts have said Italy is the eurozone country most susceptible to a debt crisis as the ECB raises interest rates and buys fewer bonds in the coming months. Nine out of 10 economists in a recent Financial Times poll identified Italy as the eurozone country “most at risk of an uncorrelated sell-off in its government bond markets”. 

Meloni's new Italian government has “given investors few reasons to worry for now”, commented Veronika Roharova, head of euro area economics at Swiss bank Credit Suisse. She added:

"But concerns could resurface as growth slows, interest rates rise further and [debt] issuance picks up again."

Italy inflation forecasts for 2023 and beyond

In a autumn macroeconomic updated dated 11 November 2022, the European Commission forecast Italy's inflation rate in 2023 to fall to 6.6%, decreasing further to 2.3% in 2024. The forecast read: 

"The energy price shock and the worsening external outlook are set to take their toll and push the Italian economy into a contraction this winter. Thanks to solid growth in the first three quarters of the year, real GDP growth is forecast at 3.8% in 2022, before slowing down to 0.3% in 2023 and picking up to 1.1% in 2024."

"Amid broadening price pressures largely originating from sharply rising energy prices, HICP inflation is set to average 8.7% in 2022. Energy prices are assumed to reach their peak end-2022 and start slowly falling thereafter, while wage growth is expected to pick up only gradually and with a lag, as several wage agreements had already been concluded before the energy prices shock. Consumer price inflation is projected to moderate to 6.6% in 2023, before falling further to 2.3% in 2024."

The Bank of Italy was optimistic about Italian inflation over the next few years. In its December macroeconomic projections, the bank forecast the Italy inflation rate to average 8.8% in 2022, 7.3% in 2023 and 2.6% in 2024, slightly revising its prediction figures from October. The revision was attributed to "a more persistent pass-through of energy price increases along the price formation chain and more pronounced wage growth in 2024". Economists predicted that inflation would stay elevated in the short run as a supply crunch and the war in Ukraine keeps prices elevated.  

"The projections presented under the baseline scenario are surrounded by exceptionally high uncertainty, associated with developments in prices and in the availability of commodities, both of which are affected by the course of the conflict in Ukraine, trends in world trade, and the repercussions of the current phase marked by a tightening of monetary conditions at global level. Overall, the risks to growth appear to be tilted to the downside. Those to inflation look more balanced: those tilted to the upside are mainly connected with possible further rises in energy prices. Conversely, especially in the medium term, downside pressures could materialize following a more marked and persistent deterioration in aggregate demand."

TradingEconomics, as of 9 January 2022, was more upbeat on Italy’s potential to bring down prices quickly. The economic data provider expected the inflation rate in Italy to fall to 3.2% in 2024 and 1.8% in 2025.

A long-term Italy inflation forecast compiled by Statista in July 2022 suggested inflation could hit its 2% target by 2025 and stay that way through 2027.  

Note that analysts' predictions on Italy inflation rate can be wrong. Their forecasts shouldn’t be used as a substitute for your own research. Always conduct your own due diligence. Remember that your decision to trade or invest should depend on your risk tolerance, expertise in the market, portfolio size, and goals. And never trade money that you cannot afford to lose.

FAQs

What is Italy's inflation rate?

Italy's inflation in December 2022 was 11.6% – down from 11.8% in the previous month, but 2.4% above the rate in the wider eurozone.

Is inflation expected to rise in Italy?

The Bank of Italy was optimistic about Italian inflation over the next few years. In its December macroeconomic projections, the bank forecast the Italy inflation rate to average 8.8% in 2022, 7.3% in 2023, and 2.6% in 2024, slightly revising its prediction figures from October. The revision was attributed to "a more persistent pass-through of energy price increases along the price formation chain and more pronounced wage growth in 2024". Economists predicted that inflation would stay elevated in the short run as a supply crunch and the war in Ukraine keeps prices elevated.  

Note that analyst predictions can be wrong. Always do your research before making an investment or trading decision. And never invest or trade more than you can afford to lose.

What is the expected inflation rate for the next 5 years?

According to data compiled by Statista in July 2022, inflation in Italy could gradually decline to hit 2% by 2025 and maintain at that rate until 2027. TradingEconomics, as of 9 January 2022, was more optimistic and forecast the inflation rate in Italy to fall to 3.2% in 2024 and 1.8% in 2025.

Note that analyst and economic agency predictions can be wrong. Always do your own research.

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