the Italian economy: why is inflation in Italy lower than in the rest of Europe?

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

Although Italy’s economic activity has slowed significantly compared to the high post-pandemic growth rates seen in 2021 and 2022, it has proved to be enough to effectively reduce inflation without triggering a recession.

In essence, the delicate balance that central banks have long strived for when it comes to high price pressures has been achieved.

Inflationary trends in Italy

Italy’s annual rate of consumer inflation in March 2024 was 1.3%, according to preliminary data released by Istat, the country’s statistics office, on Friday.

This figure represents an increase from the previous figure of 0.8%, although slower than the expected 1.4%. Monthly inflation also increased by 0.1%, falling short of the expected 0.2%.

This slight increase in inflation can be explained by the weakening of the decline in energy prices (-10.8 percent in March compared to -17.3 percent in February) and the acceleration in the growth of prices for transport services (4.4 percent compared to 3.8 percent) . .

On the contrary, prices for unprocessed food products slowed down in March (2.6% compared to 4.4%). The annual dynamics of prices for the food basket also showed a decrease (3.0%), and the core inflation was 2.4% (a modest increase from 2.3%).

Italy’s annual inflation rate has fallen 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 eurozone average of 2.6% in February 2024 year. year and is expected to decrease slightly to 2.5% in March.

Why has Italian inflation fallen so much?

In addition to the improvement in supply factors that affect inflation, such as a significant reduction in energy prices, inflationary pressures in Italy also decreased under the influence of demand.

Mainly in recent years, the Italian economy has been effectively influenced by monetary policy.

Higher interest rates set by the European Central Bank discourage both companies and households from borrowing, thereby cooling the economy and effectively curbing inflation.

The aggregate volume of loans issued by the Italian economy and enterprises is still in the dynamics of contraction and further decreased by -2.6% in January and -2.7% in February, according to the latest data from the Italian Banking Association (ABI).

Inflation forecasts in Italy

According to the European Commission’s latest forecasts, inflation in Italy will be 2.0 percent in 2024 and 2.3 percent in 2025, driven by expected wage growth, especially in the public sector.

“According to forecasts, inflation will remain much lower than the Eurozone average,” said Paolo Mamelli, Banca IMI economist.

The analyst explained that core inflation in Italy has consistently lagged behind the eurozone average over the past two years, and that trend is expected to continue due to subdued wage growth.

Overall, he forecasts core inflation in Italy to pick up slightly over the year, remaining close to the 2% threshold on average in both 2024 and 2025.

It is very important that the decline in inflation in Italy was not accompanied by an economic recession or a deterioration in employment conditions.

Has Italy achieved a “soft landing”?

In February 2024, the purchasing managers’ index (PMI), which reflects activity in Italy’s services sector, showed signs of expansion, marking the highest level of growth in eight months.

Dr Tariq Kamal Chaudhry, economist at Hamburg Commercial Bank, noted the resilience of Italy’s services sector, highlighting “sustainable growth” in new orders and a “soft push” from abroad, leading to a “sound employment situation”.

The latest labor market data shows that Italy’s unemployment rate hit a 16-year low of 7.2 percent in January 2024.

Eleanor Denison, an economist at S \u0026 P Global Market Intelligence, noted an improvement in sentiment among Italian private companies, presenting more positive forecasts for “investment, employment and profits” in various sectors.

Bert Collin, ING’s senior eurozone economist, noted slower export growth in Germany and the Netherlands compared to Spain, Portugal, Greece and Italy, while expressing optimism for industrial companies in southern Europe.

Overall, Italy has had a successful soft landing, effectively managing moderate growth and controlling inflation. Going forward, it will be very important to monitor how the potential interest rate cut later this year and the state of the global economy will affect inflation in Italy.