Analysis of inflation dynamics in Italy through supply-demand decomposition and price persistence*

This paper investigates the main drivers of inflation in Italy in recent years, focusing on whether the initial inflationary pressures associated with imported inputs and rising production costs remained the dominant source of inflation over time. To this end, we decompose Italian HICP inflation into supply- and demand-side components using a unique dataset that combines detailed price and volume indicators across consumption categories over the period 2001–2023, enabling a granular assessment of inflation dynamics. The study also examines the contribution of HICP components characterized by different degrees of persistence in their inflation dynamics. To this end, we adopt a micro-level approach based on the Hurst exponent, computed on changes in year-on-year inflation rates. As a model-free measure of persistence, it allows us to distinguish inflation components characterized by persistent dynamics from those driven by more transitory fluctuations. The results reveal that supply factors predominated during the 2021–2022 inflation surge, whereas demand factors became the primary drivers from mid-2023 onwards. Notably, inflationary pressures continue to be sustained by components displaying more persistent inflation dynamics, particularly within goods, and especially food products, rather than services.