Italy’s larger-than-expected rise in consumer prices in April could be an important signal of an economic rebound for the country’s struggling economy, but economists say Italy won’t see sustained economic growth until it sees exports increase.
Prices in April rose 1.9 percent in Italy compared to the previous month, the largest one-month increase in four years and a much better sign of a robust economy than the 0.5 percent drop in prices registered a year earlier. Economists had been predicting prices would rise a little less than 1 percent in April.
While high, sustained inflation can wreak havoc on a country’s economy by eroding the value of wages, economists say an uptick in inflation for a country grappling with anemic economic growth and high levels of unemployment is a good sign because it signals an increase in demand from consumers. Over time, strong demand will encourage companies to produce more goods.
“It’s a positive sign,” Giancomenico Piluso, an economist with the University of Siena, told Xinhua. “On its own, the value of this indicator is probably limited. But seeing prices rise by nearly 2 percent is much better than the alternative.”
According to Patrizio Tirelli, a professor of economics, quantitative methods, and business strategy at the University of Milan-Bicocca, higher prices can also have a positive impact on the government’s balance sheet.
The ISTAT, Italy’s National Statistics Institute, released the inflation figure for April also noted that Italy’s government debt reach a record high of 2.26 trillion euros (2.49 trillion U.S. dollars). But Tirelli said that if moderate inflation continues it could make the country’s massive debt more affordable.
“Italy’s long-term debt, the 30-year bonds, is currently calculated with expectation of around 2 percent inflation.,” Tirelli said in an interview. “If inflation is at that level or higher it means it will be much easier for the government to pay off that debt without cutting back on government services or raising taxes.”
What is unclear is whether the increase in the inflation rate is part of a sustained trend or a situation caused by temporary circumstances.
One problem for Italy, Piluso said, is that the economy is too small and too weak to be its own motor of growth. In other words, the country’s internal consumption is not enough to fuel an economic recovery on its own. Any lasting economic recovery for Italy will include an increase in exports. But exports did not increase in step with the rising prices so far this year.
There’s encouraging news in that inflation for the European Union as a whole in April was about the same as for Italy — 2 percent — indicating healthy demand for Italy’s main trading partners.
Italy’s main non-European trading partners, including the U.S., China, and parts of the Middle East, are also healthier economically than Italy is, meaning they could also see an increase in demand for Italian goods.
The less encouraging aspect, however, is that that has not yet happened. The higher inflation rate in April was driven more by domestic factors than by exports.
“That’s the bad news in these figures,” Piluso said. “Without a rise in exports the economy will suffer.” Enditem