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The drivers of inflation dynamics in Italy over the period 2021-2023

Author

Listed:
  • Davide Delle Monache

    (Bank of Italy)

  • Claudia Pacella

    (Bank of Italy)

Abstract

In this paper, we use the Bank of Italy's quarterly model to decompose the pattern of inflation in Italy over the 2021-23 period into the contributions from its most important drivers: international factors, like the prices of commodities and manufactured goods and the foreign demand; exchange and interest rates; fiscal measures; pressures stemming from unexpectedly strong domestic demand. Most of the increase in inflation in 2021-22 can be attributed to the direct and indirect impact of the extraordinary rise in international prices, which also drove the decline in 2023. Fiscal support measures helped to contain the impact of energy commodity prices on inflation in 2021-22, but their effect was reversed in 2023. Monetary policy contributed to dampen inflation, especially in 2023. Finally, the inflationary pressures arising from the unexpectedly strong growth in aggregate demand and employment were overall contained over the period 2021-23, partly as a result of a sluggish adjustment of wages.

Suggested Citation

  • Davide Delle Monache & Claudia Pacella, 2024. "The drivers of inflation dynamics in Italy over the period 2021-2023," Questioni di Economia e Finanza (Occasional Papers) 873, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_873_24
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    File URL: https://www.bancaditalia.it/pubblicazioni/qef/2024-0873/QEF_873_24.pdf
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    More about this item

    Keywords

    inflation; energy prices; macro-econometric model; policy simulations;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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