Italian Inflation Edges Lower in June; A Benevolent Trend- But a Stingy One

HICP Trends- Italian inflation fell by 0.2% in June; its core elevated by 0.4% month-to-month. Sequentially, headline inflation paces at 6.7% over 12 months, that falls to a very skinny 0.3% over 6 months, and then expands sharply to register an annualized gain of 5.5% over 3 months. The headline figure has been quite volatile. However, core inflation is up by 6.1% over 12 months, up at a 5.3% annual rate over 6 months and at a 4.3% annual rate over 3 months. The core rate shows sequential deceleration in the face of headline inflation turbulence.

Domestic inflation trends- Italy's domestic CPI follows the same pattern as the EMU-wide harmonized gauge (HICP) for its headline and core. The headline for domestic inflation rises 6.4% over 12 months, falls sharply on a 0.8% annual rate increase over 6 months, and then rises back to a 4.1% annual rate of change over 3 months. The domestic Italian CPI excluding food & energy shows sequential deceleration like its HICP counterpart. It rises at a 5.6% pace over 12 months, slides to a 4.8% pace over 6 months, and logs a 4.0% annual rate over 3 months. The HICP measure and the Italian domestic measure of inflation are giving the same signals about inflation. Headline inflation has been high and volatile and has had some bounce back over the last three months, while core inflation, undeterred, continues to edge down. But core inflation is still running at a rate of 4% or more over the last 3 months. Its pace over 12 months, on the other hand, a pace that that the ECB pays more attention to, is still in the area of 5 ½ percent to 6 ½ percent.

Acceleration/deceleration trends are mixed- The table provides evidence on inflation’s acceleration and deceleration over 3 months, 6 months, and 12 months. Over 3 months compared to 6 months, gauging acceleration across categories, inflation is accelerating in half the categories (diffusion = 50%). Over 6 months compared to 12 months, inflation accelerates in only about 42% of the categories. Over 12 months compared to 12-months ago, inflation accelerates in 83% of the categories. Looking at the data in the table, the year-on-year acceleration figure seems high considering that the HICP headline and the domestic CPI headline both show increases on the order of 6 ½ percent or so over 12 months compared to gains of over 8% a year ago. If inflation is so much lower now, why is diffusion higher in comparison? Looking at the core inflation rates, we find the answer: the year-ago HICP core inflation was 4.1%; over the last 12 months the core inflation rate is 6.1%; a year ago the domestic core rate was at 3.8% and over the last 12 months is 5.6%. So, while the headline gauges have decelerated, it’s the core rates that are accelerating and reflected in the diffusion index.

Quarter-to-date inflation- The quarter-to-date data reflect the finished second quarter. Inflation in Q2 logs in at a 2.8% annual rate increase for the headline and a 3.8% annual rate increase for the core in the HICP. Domestic inflation on the Italian gauge has a headline gain of 2.4% with the core much hotter at a 4.7% annual rate increase.

Italian inflation follows international patterns- Italy's inflation trends look a lot like the inflation trends we see in other countries and regions where the headline rate is high, but it has come down quite sharply compared to the core rate that shows some deceleration but still has been stubborn. There's been a lot of speculation about inflation in the U.S. because its recent inflation statistics showed smaller gains than expected. But in the U.S. statistics, you see the same thing. It's a global phenomenon that shows that headline inflation has weakened, because of energy prices and some let up in food prices while other prices outside of the food and energy complex, known as ‘the core’ continue to show strong price increases and as wage increases tend to spread putting more cost pressures on firms.

Confused ‘fairy tale’ analysis- The analysis of how this is going to work out has been confusing since, as with all things these days, analysis is accompanied by a lot of value judgments. Apparently when headline inflation exceeds wage inflation we have ‘greed inflation’ and when wage inflation is stronger than price inflation ‘that's good.’ On the other hand, when wage inflation is stronger than price inflation, it's highly likely we're headed for a wage price spiral and rather than thinking that that's good because it’s going to support consumer spending and a longer economic expansion- we need to take the next step.…Failing to do that truncates the line of thinking. More likely, more spending and less unemployment would support or boost inflation and prompt central banks to raise interest rates more and set the stage for a more severe recession, although one that might be pushed out into the future a bit more. I am struck by how much analysis is willing to assume ‘fairy tale’ endings with lower inflation, a soft-landing, no recession with inflation back at ‘some acceptable’ level. Part of this is because some people have a ‘higher acceptable level’ for inflation than others. Remember in the U.S., childhood fairy tales were told by the brothers Grimm…

A clear-eyed, sober, look at inflation prospects- Inflation is not to be analyzed based upon some subjective values. Analysts must look at inflation with an objective eye and recognize that anything that creates cost pressure is likely to push prices up. Things have happened in the global economy that have caused wages to fall relative to prices. The Bank of England’s Chief economist, Huw Pill, has mentioned this in a recent comment saying that the standard of living has fallen in the U.K. and if workers try to increase wages to get back what they've lost they will simply create inflation.

War! What is it good for? INFLATION! As we look at the scene globally, clearly a lot of money is being poured into the black hole that is a war between Ukraine and Russia. And while each side hopes it will reap some benefit from all the money spent, this is money that's going up in smoke. It's being used to destroy physical property, to kill people and destroy their human capital. It's not surprising that in the wake of a war, living standards are falling. Warfare is not an investment good. The war has also interrupted food and fertilizer supplies and had other impacts that clearly have reduced the global standard of living and helped to raise prices (inflation); we're seeing that in wages as well. It's foolish to think that central banks can get this back for us in some way with monetary policy trickery. And it’s foolish to think that wages are going to rise back and workers will restore their standard of living to ‘happily-ever-after’ standards. Central banks need to put an end to the erosion in standards of living from rising inflation. Standards of living have taken a step down everywhere and to deny that fact is to deny reality. To try to make firms that are producing goods under difficult and changing circumstances, the bad guys are just an attempt to create class warfare. Neither firms nor workers are good guys or bad guys. Both are caught in the crossfire of inflation and of repeated economic shocks; both are trying their best to survive.