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

Italy's inflation rate rose to 1.3% in March from a year earlier, although slower than expected.

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

While Italy's economic activity has slowed significantly post-pandemic from the elevated growth rates observed in 2021 and 2022, this has been just enough to effectively reduce inflation without triggering a recession.

Essentially, it has succeeded in achieving a delicate balance that central bankers have long sought in dealing with high price pressures.

Inflation trends in Italy

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

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

This slight increase in inflation is due to the slowing decline in energy prices (-10.8% in March compared to -17.3% in February) and the acceleration of prices for transport services (4.4% compared to 3.8%).

In contrast, unprocessed food prices slowed in March (+2.6% versus +4.4%). Annual dynamics of “shopping cart” prices also showed a decline (+3.0%), while core inflation stands at +2.4% (a modest increase of +2.3%).

Italy's annual inflation rate has fallen by more than 10 percentage points since hitting a four-decade high of 11.8% in October 2022 and remains well below the euro area average, which was 2.6% in February 2024 and is expected to fall slightly to 2.5% in March.

Why has inflation fallen so sharply in Italy?

Apart from improvements in supply-side factors affecting inflation, such as the significant decline in energy prices, inflation pressures in Italy have also eased due to demand-side influences.

In general, monetary policy has effectively influenced the Italian economy in recent years.

Increased interest rates set by the European Central Bank have discouraged both businesses and households from borrowing, dampening the economy and effectively curbing inflation.

Aggregate loans to Italian households and companies remain in decline territory, falling further by -2.6% in January and -2.7% in February, according to the latest data from the Italian Banking Association (ABI).

Italy's inflation forecasts

According to the latest forecasts from the European Commission, inflation in Italy is expected to be 2.0% in 2024 and 2.3% in 2025, reflecting an expected increase in wages, especially in the public sector.

“Inflation is expected to remain well below the euro zone average,” said Paolo Mameli, an economist at Banca IMI.

The analyst said core inflation in Italy has consistently lagged behind the euro area average over the past two years, a pattern that is expected to continue due to subdued wage growth.

In general, he expects that overall inflation in Italy will rise slightly over the course of the year and will remain close to the 2 percent threshold on average in both 2024 and 2025.

Of paramount importance is that the decline in Italian inflation was not accompanied by an economic downturn or a deterioration in employment conditions.

Did Italy actually make a soft landing?

In February 2024, Purchasing Managers' Index (PMI) surveys of activity in Italy's services sector showed signs of expansion, marking the highest growth reading observed in eight months.

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Dr. Tariq Kamal Chaudhry, an economist at Hamburg Commercial Bank, has highlighted the resilience of Italy's services sector, stressing that “steady growth” in new orders and a “gentle boost” from overseas would lead to a “robust employment situation”.

The latest labor market data shows that Italy's unemployment rate reached 7.2% in January 2024, its lowest level in 16 years.

Eleanor Dennison, economist at S&P Global Market Intelligence, highlighted improved sentiment among Italian private companies, with more positive forecasts for “investment, employment and profits” across various sectors.

Bert Colijn, senior euro zone economist at ING, pointed to slower export growth in Germany and the Netherlands compared to Spain, Portugal, Greece and Italy, and expressed optimism for industrial companies in southern European countries.

Overall, Italy successfully managed a soft landing, managed subdued growth effectively and controlled inflation. Going forward, it will be crucial to monitor the impact of possible interest rate cuts later this year and how the global economy affects Italy's inflation patterns.

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