The expected rebound in Italian headline inflation in January turned out to be smaller than expected. According to preliminary data from Istat, headline inflation stood at 0.8% year-on-year (up from 0.6 in December), below consensus.
The breakdown shows that the inflation picture is becoming more complex. Energy continues to be the most powerful driver, with strong annual contractions in unregulated (-21.2% year-on-year) and regulated (-21.4%) energy goods. In the case of the latter, we expected that the return to standard VAT rates and the reintroduction of some suspended overhead cost components would have pushed inflation higher, but the lower cost of energy raw materials appeared to limit the boost. Other items other than regulated energy goods also contributed to the increase in general inflation. Only transportation services and non-fresh foods; Housing services and durable goods provided a disinflationary boost.
Consistently, the core inflation rate fell for the ninth consecutive time to 2.8% (from 3.1% in December), at a slightly decelerating pace.
The inflation profile will be crucially dominated by developments in energy goods and the gradual removal of their favorable base effects. For the moment, despite the increase in transport costs linked to the developments in the Red Sea/Suez Canal, manufacturers have not expressed increasing intentions to raise prices. However, if the disturbance persists, some transfer in the most exposed sectors cannot be ruled out. Service providers show tighter pricing intentions: the relevant indicator only fell marginally in December. The evolution of wage growth will influence the setting of the trend of inflation in services.
Today’s inflation release shows that the return of headline inflation to the 2% area could occur later than expected, adding downside risks to our forecast for average headline inflation of 2.2% by 2024.