Italian Inflation Slows Down and Speeds Up; Headline Stronger; Core Weaker on Trend

Italian inflation shows the headline HICP measure at 0.2%, rising in February slower than the January gain of 0.5%. Core inflation was flat in February after rising 0.3% in January. The Italian domestic headline CPI measure also rose 0.2% in February, a little weaker than the 0.3% gain in January. The core to the domestic CPI was flat in February compared with 0.1% rise in January. Month-to-month inflation slowed. The January-February data generally show inflation contained except for uncomfortable readings for the headlines in January for both the HICP measure and the domestic CPI measure.
Sequential trends Stepping back from monthly data, the sequential HICP measures show inflation moving back up again; there's a 1.7% gain over 12 months that dips to 1.3% at an annual rate over six months then accelerates to a 3% annual rate over three months. In contrast, the HICP core decelerates steadily, rising 1.7% over 12 months, at a 1.4% pace over six months, and settling down to a 1% annual rate over three months. The domestic CPI basically mimics those trends, but the headline CPI is up 1.6% over 12 months, up at a 1.2% at an annual rate over six months and then climbing at a 2.3% annual rate over three months. The core domestic CPI is up 1.7% over 12 months, up at a 1.2% pace over six months and up at only a 0.7% annual rate over three months. Both inflation surveys show uneven inflation in the headlines with the tendency to accelerate against clear decelerating trends for the core. However, the 12-month measures for inflation in Italy on headline and core for either survey are all below the 2% pace sought by the ECB for the target for the overall Monetary Union. Inflation in Italy is contained in the range desired by the European Central Bank
Inflation quarter-to-date The trends for the HICP and for the domestic inflation gauge reveal a headline series that shows more inflation than the core series and for each of them. In the quarter-to-date, annualized headline inflation is above 2%. It’s at 3.2% on the HICP measure and at 2.5% for the domestic CPI measure. However, in each case, the core measures are well below what the ECB seeks for an inflation target with the HICP core at a 1.5% annual rate and with the domestic core CPI pace at 1% at an annual rate. Having the better news on the core is good since that measure trends to be more stable while the headline is especially kicked around by energy prices.
Inflation breadth (diffusion) Generally speaking, inflation in Italy has been under control for some time. Diffusion measures show that inflation is not accelerating in more categories than it's decelerating over 12 months, six months, or three-months. Over 12 months, the diffusion gauge is at 41.7%, indicating that only about 41% of the categories are showing acceleration, the same as over three months, which means that inflation is more broadly decelerating than accelerating.
Monthly inflation diffusion by category However, in terms of categories we find that looking at monthly data, inflation is steadily accelerating for (1) alcohol & tobacco, (2) clothing & footwear, (3) rent & utilities, (4) housing & furniture, and (5) restaurants & hotels. This is a significant number of categories looking at the price changes monthly for December, January, and February. On the same monthly timeline, prices are steadily decelerating for (1) transportation equipment and (2) recreation & culture while (3) education logs zero inflation in each of the most recent three months!
Sequential price trends and extreme price changes Looking at inflation categories over 12 months to 6 months to 3 months, the picture shifts. On this timeline, (1) alcohol & tobacco shows acceleration, (2) clothing & footwear prices show acceleration, and (3) health care tends to acceleration. Prices show decelerating trends sequentially for (1) housing & furniture, (2) communications, and (3) recreation & culture. In terms of extreme price changes over 12 months, communications prices fall 4.9% while rent & utilities, and restaurant & hotel prices each rise by 3% or more. Over three months prices fall by 6.4% annualized for communications; they also fall for housing & furniture, and recreation & culture but fall mildly. Prices rise by 17.9% annualized for rent & utilities and by 5.2% for alcohol & tobacco over three months.

Summing up On balance, the trends are still a jumble. But the overarching data speaks of contained inflation within the framework desired by the ECB. Italy is a European inflation success story despite its minor cross-currents. This is surprising with Germany on the other side of the coin, still running inflation too hot (but not by much) and even in that case, inflation trends in Germany do not appear to be accelerating and appear to be contained. This is a far cry from the world that existed when the EMU was formed. But things do change, and they have. Italy remains as Europe’s inflation success story, while Germany has work to do.
Robert Brusca
AuthorMore in Author Profile »Robert A. Brusca is Chief Economist of Fact and Opinion Economics, a consulting firm he founded in Manhattan. He has been an economist on Wall Street for over 25 years. He has visited central banking and large institutional clients in over 30 countries in his career as an economist. Mr. Brusca was a Divisional Research Chief at the Federal Reserve Bank of NY (Chief of the International Financial markets Division), a Fed Watcher at Irving Trust and Chief Economist at Nikko Securities International. He is widely quoted and appears in various media. Mr. Brusca holds an MA and Ph.D. in economics from Michigan State University and a BA in Economics from the University of Michigan. His research pursues his strong interests in non aligned policy economics as well as international economics. FAO Economics’ research targets investors to assist them in making better investment decisions in stocks, bonds and in a variety of international assets. The company does not manage money and has no conflicts in giving economic advice.