Italian Inflation Trends Cool…Relatively

Italy's inflation metrics in July showed a headline for the HICP rose 0.3% after falling 0.2% in June. The core rate was unchanged after rising 0.4% in June. The domestic CPI measure rose 0.2% in July after falling 0.1% in June. And the domestic CPI excluding food & energy rose 0.1% in July after rising 0.2% in June. These comparisons show that the HICP and the domestic inflation metrics for Italy had been behaving much the same in the last couple of months.

If we take a longer perspective, we find that we get pretty much the same readings and trends out of both the domestic CPI and the HICP gauges. For this discussion, I'm not going to repeat the HICP, and I will simply talk about the domestic CPI prices because they are the prices consistent with the detail in the table below.

Sequentially, Italy's CPI headline rises 6% over 12 months, eases to 1.9% pace over 6 months and then picks-up to a 3.1% annual rate over 3 months. The core measure gains 5.2% over 12 months, then slows to a 4.2% annual rate over 6 months and slides further to a 2.9% annual rate over 3 months. Italy's headline inflation rate appears to be cooling although it isn't doing it precisely sequentially; the core measure is showing a decline in inflation that is occurring sequentially.

Sequentially, the details on Italian inflation show broad deceleration occurring over 3 months and 6 months. Comparing 3-month inflation to its 6-month pace, only three categories show an accelerated pace; those are: rent & utilities, education, and restaurants & hotels. Over 6 months inflation is stronger than it is over 12 months in only three categories: alcohol & tobacco, transportation, and restaurants & hotels. Over 12 months compared to 12-months ago annual inflation is broadly hotter across categories; it's lower in only two categories: rent & utilities and transportation.

Calculating third quarter inflation by looking at the July increase over the quarter average in Q2, gives us a properly compounded annual rate of 2.0% for the CPI headline compared to 2.1% for the core CPI. The domestic inflation gauges are showing headline and core inflation running out of neck-to-neck pace that would be completely in-lined with the ECB's 2% target.

Of course, the ECB only looks at year-over-year inflation to assess results. I'm sure central bankers also look at these other progressions over the 6 months and 3 months, but they placed weight on the year-over-year data. Year-over-year Italian inflation is still running high (5% to 6% between the core and headline). However, the 3-month progression in the performance of the core rate as well as its performance as it enters Q3, certainly is encouraging. That might encourage the ECB itself to think that inflation has taken steps and that beyond that inflation may be behaving. However, Italy is only one of many ECB members. And it's certainly premature to declare victory over inflation especially with the Russia-Ukraine war going on and with the pulse we expect to food prices given the restrictions of grain shipments out of Ukraine and with the recent increase and oil prices as well. Still, globally there is much weaker inflation out of China that could have far-reaching consequences. Inflation’s dynamics and outlook remain fluid.