For inflation means theprogressive increaseover time, of general average price levelresulting in a decrease in the purchase value of a currency. Let’s take an example in simple words: if at a specific moment of the year the level ofinflation is at 10%it means that the prices of the goods and services we can buy (from milk to bread, from clothes to bus tickets) have increased on average by 10% compared to exactly one year ago. In other words, if last year all we needed to buy product 10 euroswe need them today 11 euros (i.e. 10% more). This means that if our earnings have not grown at the same level as inflation, our purchasing power (i.e. our ability to buy things with a certain amount of money) has been reduced: we are concretely poorer because our money it allows us to buy fewer things than a year ago, so in a certain sense it is “worth” less.
What is inflation in a nutshell: Why goods prices increase over time
As we said, inflation is the average increase in the prices of goods and services over a given period of time. They have developed over the years various theories on why the prices of goods and services tend to increase more and more. Without going into too much detail let’s see the underlying concept, that is supply and demand mechanism. We see this by doing a example with a common good: the Flour.
When people’s demand for a good increases and exceeds the quantity offered, i.e. available on the market by those who sell it, the price of that good grows. In fact, people are willing to pay more just to get what they need, given that there is not enough of that good for everyone.
In 2020, for example, during the Covid-19 pandemica product that sold like hot cakes was the flour for making pizza and homemade desserts. In that period, in fact, there was an exponential growth in the population’s demand for flour (in jargon we speak of demand-driven inflation) which increased the price (whoever was selling it, in fact, didn’t have enough for everyone and was able to afford to raise the prices).
However, the excess demand for a good compared to the available supply can sometimes also be caused by one sudden reduction in the quantity produced and not from an increase in consumer demand. In 2022, for example, the war between Ukraine and Russia made the production of some raw materials produced in the two countries difficult; among these products there was also wheat, so the companies that used wheat of Russian-Ukrainian origin found themselves having a smaller quantity and paying more for it, thus increasing the cost of that good also for the end customer (in jargon we talk about supply-driven inflation).
To complete the picture, it may also happen that there is a risk behind the increase in inflation change in both supply and demand.
How is inflation calculated in a country
First of all, the impact of inflation is not the same for everyone, as it depends on people’s specific consumption habits. Therefore, to calculate inflation in a country it is necessary to first have a so-called “consumer price index”that is, a reference of the average prices of certain goods and services in that country.
In Italy, the task of determining the consumer price index is in the hands ofIstatwhich, based on a basket (a set) of goods representative of what Italian families buy most (ranging from bread, milk to petrol), establishes this reference.
So, if and when the prices of the things we normally buy change, a percentage change in inflation. If, however, prices were to decrease we would be talking about deflationbut we will cover this topic another time.
The trend of inflation in Italy over the last 10 years
As can be seen from the graph below, in the last 10 years inflation in Italy has been stable for several years, with initially an alternation of small increases and even small drops in prices, until coinciding with the period post-pandemicthe war between Russia and Ukraine and the energy crisis there was a dramatic rise in the prices of goods and services up to the maximum peak reached between 2022 and 2023; finally we can see how the various monetary policy initiatives have brought the cost of living down to an almost normal situation.
