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The cost of living in Italy dropped 0. 6 percent in January compared to the same month in 2014, the biggest single-month drop in more than half a century, a development economists say could erode some of the economic benefits from a weaker European currency.
Prices in Italy dropped in three of the 12 months in 2014, according to ISTAT, Italy's national statistics bureau. But none of those months saw the kind of erosion of the cost of living as dramatically as in January, which had the largest one-month level of deflation since September 1959, when the post-World War II rebuilding efforts were drawing to a close.
In the short-term, consumers welcome deflation because it means prices for every-day expenses like food, transportation, energy, and consumer goods are lower, increasing their buying power.
But sustained deflation - something that appears to be a growing risk for Italy and some other countries in the eurozone - is problematic because it makes it harder for the government to pay down debt from a shrinking tax revenue stream. It also makes it more difficult for companies to remain profitable, since they must pay workers fixed salaries while charging less for their products.
"A sustained period of deflation hurts Italy more than most countries," University of California economist Karl Flattery told Xinhua. "The country is already struggling under debt equivalent to 135 percent of its gross domestic product and that would become much more challenging to pay down. And if companies start to suffer, that will drag the stock market indexes lower and there will be layoffs, adding to an already-high unemployment level."
Another problem for Italy, according to Flattery and others, is that deflation could help neutralize some of the expected gains from a weakening euro, which has lost more than a fifth of its value against the U.S. dollar and other world currencies in the last nine months.
Economists have predicted that a weak euro would increase demand for Italian exports and attract higher levels of tourism to the country. But falling prices combined with anemic economic growth could leave Italian companies too weak to take advantage of new opportunities.
In the past, Italy's central bank could head off deflation risk by adding to the money supply, either by lowering interest rates or otherwise acting to devalue the currency. But since the introduction of the euro, those options are off the table for individual eurozone countries.
"Many of the steps a central bank can take to confront deflation are the same ones that lead to a currency weakening, and those steps are already being taken," Milan-based economist and financial analyst Javier Noriega said in an interview. "In Italy, demand is weak despite that. But the hope is it won't last long."
Flattery, who is in Italy working on a book project about Italy' s economy, agreed.
"Right now, it's just one month, even if it's a dramatic one," he said. "The European Central Bank is doing the right things, and Italy is doing what it can to stimulate more economic activity. It' s still just a small cause for concern. But if it snowballs and we have the same conversation in two or three months, that will no longer be the case." Enditem
