Anatomy of inflation and consumption choices in Italy after the pandemic

We study the drivers of the post-pandemic inflation episode in Italy and its implications for households' consumption baskets. Using granular monthly data on prices and quantities consumed, we disentangle supply from demand-driven inflationary pressures across expenditure categories. We show that the rise in inflation since 2021 was initially driven mainly by supply-side shocks, reflecting bottlenecks in global value chains and the exceptional increase in energy prices, while demand-side factors have gained importance since 2023. The inflationary shock affected consumption categories unevenly, with particularly large increases in the relative prices of essential items such as energy, food and housing-related expenditure. Since these goods are characterized by low price and income elasticities, households reduced their consumption only marginally and absorbed the shock by allocating a higher nominal share of expenditure to essential goods. As a result, the nominal weight of necessary items in the consumption basket increased persistently, while the adjustment of the basket in real terms and the reallocation towards discretionary components took place only gradually.