Commentary. In Italy, the level of producer and consumer inflation is gradually diverging from the real economy, which is now alarmingly flat. This decoupling has no economic justification.

Inflation in Italy is being driven purely by profit-seekers

An economic analysis of Italy across the years 2000-2020 reveals something anomalous and unpleasant.

Production and consumer inflation are systematically higher here than in Germany and France – although this is true to a lesser extent for consumer prices and more severely for producer prices, especially compared to Germany.

But this national (producer and consumer) inflation has no economic justification – except in the most recent period, which needs a separate, more in-depth investigation. The dynamics of what is simply called “prices” actually conceals something much more unjust and dramatic.

Not getting into the technical and economic meaning of inflation, the price index should measure the prices of an equivalent good over time, and I challenge anyone to find a good that would meet these technical characteristics.

The medium-term analysis of Italy shows a price dynamic which is perhaps consistent with that recorded by Germany and France, but unjustified with respect to the dynamics of GDP, gross and capital investment and wages.

Let’s take 100 as the initial level of the variables we’ve considered (GDP, gross investment, capital goods, wages of Italy, Germany and France). We see that Italy has remained more or less at the levels of 2000, while the other two countries recorded some improvement; perhaps not enough, but at least consistent with the growth of inflation in Germany and France.

In Italy, on the other hand, we see the level of production and consumer inflation diverging more and more from the real economy, which is now on a worryingly flat trajectory: this is a divergence that has no justification.

In reality, despite the fall of all real economic variables, the levels of consumer prices and producer prices are responding to a logic that doesn’t look like capitalism, but rather like a “family-run” system that accrues profits on rents and adjusts prices to increase its profit margins, without having anything to do with the real activities of the economic structure.

How was it possible for investment output prices to rise from 100 to 122 (2000-2020) when investment in machinery rose from 100 to just 105?

How was it possible for consumer inflation to go from 100 to 132, again from 2000 to 2020, while wages rose only from 100 to 102?

Looking again at consumer inflation: how was it possible for this to reach 132 while GDP went from 100 in 2000 to 104 in 2019?

If we look at the bare data, there should be no inflation in Italy, either from demand or from costs (setting aside the most recent period). If we are to give a full explanation for how this makes sense, the lower inflationary dynamic that has occurred since 2011 (it would be accurate to speak of deflation) is linked to the contraction of all costs, and in particular those related to wages and even investments, for which the wheels have been greased by the tax incentives that have contributed to this phenomenon to an important extent.

Then there is an even more worrying aspect: Italian inflation levels, more or less in line with France and Germany, combined with the low dynamics of consumption and investment, suggest that an important part of both capital and consumer goods are imported. These are costs that companies are passing on as price increases in order to keep their profit levels unchanged.

Some will be quick to propose tax cuts, but any tax reduction would only exacerbate the situation, because the companies would find other ways to increase their profit margins, while wages would show such marginal improvements that they would not justify the initiative.

Inflation is rising to the levels we have mentioned, but the issue is not connected with the production costs, which are proportional to the level of specialization, but rather with the level of profits made, suggested by the price growth.

We need a program that would exclude from the economic circuit all those people and companies that are elbowing their way through the market without any morals at all (one might recall Smith’s theory of moral sentiments). The country needs capitalists, not rent seekers.

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