Italian Consumer Prices Fall in March, But They Don’t Behave

Italy's headline inflation report, the HICP, showed that prices fell by 1.1% in March. The core measure for the HICP showed prices falling 0.3% in March. These changes came after a headline increase of 0.5% and a core increase of 1.2% in February.

The sequential percent changes in the HICP show that Italian headline inflation is moving lower. Prices are up 8% over 12 months, up at a 6% annual rate over 6 months and falling at a 4.6% annual rate over 3 months. In contrast, core inflation shows some but much less inflation progress. The core deceleration is much more moderate as prices are up by 6.8% over 12 months, they soften to gain 6.5% at an annual rate over 6 months and then slow to a 6.2% annual rate over at 3 months. For the most part, core inflation has a very, very, small deceleration built into it.

Domestic vs. HICP inflation Italy also reports out a domestic CPI; the domestic CPI for Italy fell by 0.5% in March, but the core CPI did not follow suit and was up by 0.4%. Italy's headline CPI report shows inflation falling sequentially parroting the HICP result. Headline inflation rises by 7.5% over 12 months, rises at a 6.7% annual rate over 6 months and then it falls at a 2.3% annual rate over 3 months. Core inflation for the domestic measure shows more of a decline than it does in the HICP measure. Italy's domestic core inflation is up by 6.3% over 12 months, up at a 6% annual rate over 6 months, and up at a 5.5% annual rate over 3 months. The difference between the 12-month and the 3-month inflation rate is just a little bit less than a percentage point at minus 0.8% comparing annual rates. It’s a modest pace of deceleration.

Inflation diffusion is not linear Diffusion calculations (performed on domestic CPI data) show that Italian inflation over 12 months is broadly higher than it was 12-months ago with inflation accelerating in 83.3% of the categories. However, over six months inflation accelerates in only 41.7% of the categories compared to their pace over 12 months. Over 3 months inflation accelerates in 62.5% of the categories compared to their inflation rate over 6 months. Therefore, while the inflation rates have stepped down from 12-months, to 6-months, to 3-months, diffusion calculations show that these trends are not uniform across categories and that over 3 months, despite the sharp decline in inflation compared to earlier metrics, there are a number of categories where inflation is still rising when compared to its pace of 6-months ago.

Three-month patterns The patterns for inflation’s evolution in Italy are complicated. Over the last 16 months HICP core inflation measures over three-month spans measured month-by month declined month-to-month in only 9 of those 16 months. On the same basis, domestic 3-month inflation declined month-to-month in only 7 of those 16 months. However, 3-month core HICP inflation peaked in February 2023 at 9.7% and now, in March, one month later, that pace is down to 6.2%. The current 3-month inflation rate was last lower than 6.2% in May 2022. Domestic core inflation over three months peaked at 7.4% back in July 2022. Its current 5.5% pace over three months has decelerated for only one month in a row and is the lowest 3-month domestic core reading since May 2022 as well. When graphed the 3-month inflation rates look more like inflation has been somewhat volatile but at roughly the same pace since July 2022, with only a very minor tendency to decelerate. However, the six-month change in 3-month inflation shows a sharp break lower in both HICP and domestic core inflation measures occurring around December 2022.

Summing up On a quarter-to-date (QTD) basis, HIPC inflation is falling by 0.1% at an annual rate; core inflation in the quarter (now complete with march data in) is up at a 7.7% annual rate – a huge difference. The domestic inflation rate headline is up by only 0.2% at an annual rate, while the domestic core inflation rate is up at a much stronger 5.9% annual rate. There's considerable variation in the quarter-to-date inflation rates. There are very different results between the headline and the core. Taken broadly, the headline rates both show very low inflation QTD while the cores show inflation is much more stuck and stubborn with inflation at a stronger pace. HICP core inflation is stronger than the domestic core pace by nearly two percentage points. Clearly, inflation remains an issue in Italy. And Italy is one of the three largest economies in the European Monetary Union. While Italian headline inflation has broken in March, the core rates shows that there's still considerable stubbornness in the pace of inflation apart from its headline-only items.