News Analysis: Deflation risk persists despite slight rise in Italy prices

Many breathed a sign of relief when prices in Italy rose slightly in February, signaling at least temporary relief from deflation risks in the country. But observers warn the risks are still as real as ever and said the slight increase in prices in February could be just an anomaly.

Some consumers sometimes welcome deflation -- when prices fall instead of rise -- because it means lower prices for day-to-day expenses. But for governments, particularly in heavily indebted countries like Italy, deflation means trouble because it increases the real value of debt, shrinks tax revenue, and makes it hard for companies to remain profitable.

Prices fell in three of 12 months last year, before plummeting 0.6 in January. That was the largest one-month drop since 1959.

Economists predicted another smaller drop in February: the Italian media predicted a fall of 0.2 to 0.3 percent for the second month of the year. Instead, prices rose 0.1 percent -- a modest amount, but good news for those worried about deflation.

But a deeper analysis of the numbers from ISTAT, Italy's National Statistics Institute, shows there are still reasons for concern.

"The headline number seems to be good news, but a closer look shows that prices still fell in most of the sectors ISTAT monitors," Alvaro Bergamasco, a macroeconomics analyst with ABS Securities, said in an interview.

Bergamasco and others noted that prices for fuel continued to slip in step with world markets, and that lowered transportation costs for many goods, putting downward pressure on those products. Incomes remained stagnant and unemployment rates were still above 12 percent of the workforce, making it hard for demand to rise.

ISTAT reported Monday that new car sales rose in February and is now 12.3 percent better over the first two months of the year compared to the same period in 2014.

But even that is of limited relevance, since domestic automobile production remains more or less flat with the sales coming in part due to special offers aimed at getting rid of current stock. In some cases, those offers put a downward pressure on prices.

Then why did prices rise 0.1 percent in February? It was because of tobacco and vegetables.

"Tobacco shops raised prices for cigarettes, pushing tobacco prices up almost 4 percent, and vegetables prices rose 14 percent because of bad weather that hurt production," Alessandro Polli, an economic statistics expert with La Sapienza University in Rome, told Xinhua. "These are not factors that indicate strong demand."

There are some factors that could help push prices higher going forward. The euro remains weak against the dollar, something that should help European countries by making their products cheaper in dollar terms. But a smaller percentage of Italy's exports head to the United States than in many other EU states, meaning the benefits there are tempered.

A weak euro does make it cheaper for foreign tourists to travel in Europe, which is good news for Italy, one of the world's top tourist destinations. But so far, tourism has had a limited impact on overall prices.

"The exchange rate should certainly be good for tourism, but I think we'll have to wait a few months to know how big the actual impact will be," Polli said. Endit