Rising inflation complicates Italy's economic recovery plans

Prices in Italy rose faster in August than during any previous month in the past three years, further complicating the government's efforts to pay down the national debt while also sparking economic growth. According to preliminary data released on August 31, prices in August were 2.2 percent higher than a year before even though unemployment levels, economic growth, and the size of the government's deficit all worsened over the previous 12 months. "This shows you how hard an economic recovery will be," Antonio Aiello, a macroeconomic analyst with ABS Securities, told Xinhua. "While the economic conditions are worsening, prices are still going up. Traditionally, in a period of rising unemployment and slow growth, deflation can be a risk. But not unusually high inflation," he said. The inflation figure was paced by across-the-board increases in prices for transportation. Maritime transport rose the most, with costs leaping 61 percent compared to August 2010 over higher fuel prices, and rising demands. ISTAT, the national statistics institute, said that higher fuel prices also had an impact across the board. In addition, the Italian economy was hurt by the strength of the euro against the dollar, and pent-up demand in several sectors due to the drawn out economic crisis. Relatively low prices in September 2010 indicate that the country could continue to see a higher-than-usual year-on-year inflation figure in September. "This is probably not a one-month phenomenon," Aiello said. The unexpected news on the inflation front comes as the government focuses on other economic battles. In July, the government passed a 46-billion-euro economic stimulus package and is still working on the details. Meanwhile, plans to increase government tax revenue by increasing taxes on individuals earning more than 90,000 euros per year, taxes on capital gains, and on companies in the energy sector have developed into a point of friction in the government. Those changes have been endorsed by Minister of Finance Giulio Tremonti, but Prime Minister Silvio Berlusconi has since backtracked on the plan to raise taxes on wealthy individuals in an effort to limit Tremonti's power while also boosting his already sagging approval levels. The government's efforts to cut spending as outlined in the stimulus package and increase revenue are part of a wider effort to ease investor fears that the country's debt level, which is the equivalent of around 120 percent of the country's GDP, is too large and could put the country at risk of a default on its government bonds. If there is one silver lining to the events of recent days and weeks, it is that the debt level no longer appears to be as large a concern. Over the last two weeks, the yield on Italian 30-year bonds has fallen from the all-time highs it reached in early August, and international attention on the Italian economy has against switched back to more long-term problems, like the country's retirement age and other long-term spending and political issues.