Double digit inflation looms as first headache for Italy’s Meloni

By Antonella Cinelli and Valentina Consiglio

ROME (Reuters) – When outgoing Prime Minister Mario Draghi took office 19 months ago Italian inflation was running at 1%. By the time his probable successor Giorgia Meloni takes charge it may have hit double digits, underscoring her difficult task ahead.

In September Italian European Union-harmonised consumer prices (HICP)accelerated to 9.5% on year from 9.1% in August, data showed on Friday, the highest level since the index was launched in 1997.

Energy costs soared 45%, eating into households’ disposable incomes and leaving Meloni, who led a right-wing alliance to victory in Sunday’s election, facing the prospect of recession as well as inflation.

The Treasury warned on Wednesday that gross domestic product in the euro zone’s third largest economy would probably “decline slightly” over the second half of this year. It slashed next year’s growth forecast to 0.6% from 2.4%.

Meloni’s one consolation is that she is far from alone. Euro zone inflation in September came in at 10%, with Germany, the region’s largest economy, at 10.9%.

“We need a common solution at the European level to help firms and families,” the far-right Meloni said on Thursday ahead of an EU energy summit. “No member state can offer effective and long-term solutions on its own.”

Surging gas prices have been exacerbated by Russia’s invasion of Ukraine and the situation is likely to worsen due to damage this week to the Nord Stream pipeline under the Baltic sea.

POLITICAL FRICTION

Italy’s regulated household electricity prices will increase by 59% in the fourth quarter, its energy authority ARERA said on Thursday.

“We’ve never seen energy increases like this,” Federico Polidoro, head of the consumer prices division at National statistics institute ISTAT, told Reuters.

“In September, the price of electricity for consumers doubled from a year earlier, and gas was around 60% higher.”

Meloni’s election-winning alliance has been divided on how to tackle the problem.

League leader Matteo Salvini has called for a 30 billion euro ($29.33 billion) hike in government borrowing to shield families and firms from the rising costs. Meloni, who is expected to take office in late October, has rejected this, insisting on the need to be cautious with state accounts.

SPENDING LEEWAY

She is helped by the fact that the surge in oil and gas prices is boosting revenues from value-added tax and excise duties, leading to a lower-than-expected budget deficit this year.

Treasury forecasts on Wednesday showed she will have room for expansionary measures worth 9 billion to 10 billion euros this year without raising the deficit above the previously targeted level.

The rise in energy costs has had a knock-on effect on the price of many other items, from food — which is seeing double-digit increases — to services.

“Simplifying things, this means Italians will lose almost an entire monthly salary this year,” said ISTAT’s Polidoro.

Businesses are hurting as much as families.

“In a weak demand environment, it is difficult for firms to pass on costs to final prices, with the risk of a deterioration in their profitability,” said Loredana Federico, chief economist for Italy at UniCredit.

Energy as a share of total production costs for Italian firms has risen this year to 2.4% from 1.1% in 2019, according to a study by think tank Prometeia, with peaks close to 15% for some sectors.

Draghi has already spent some 66 billion euros this year to soften the impact of rising gas and electricity prices, and Polidoro said that without these measures on sales tax and duties inflation in Italy would already be over 10%.

The energy bill for the Italian manufacturing sector has risen to 32.6 billion euros this year from 8 billion in 2019, says business lobby Confindustria, estimating that it would have hit 57 billion euros without the government intervention.

($1 = 1.0228 euros)

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