Relative Price Shocks and Inequality: Evidence from Italy

Is inflation equal for all? Combining Italian Household Budget Survey (HBS), Survey on Household Income and Wealth (SHIW) and Harmonised Index of Consumer Prices (HICP) data, we investigate the heterogeneity of Italian households’ inflation experiences over the period 2015-2023, conditional on their income and other observable characteristics. Following several years of distributional inflation neutrality, we find that the price surge that began in mid-2021 especially increased the cost of living of poorer households and more fragile socio-demographic groups, contributing therefore to increase overall inequality. After peaking in the second half of 2022, the aggregate inflation rate sharply declined in 2023 and so did the differential exposure of Italian households. In addition, by mapping each of the 480 HBS items into 90 ECOICOP 3- and 4-digit level categories, we show that between 2021 and 2022 more than 20% of the measured differential inflation between the top and the bottom income deciles comes from more granular information and would remain hidden by merely relying on 2-digit product-price data. Finally, the comparison over time between Laspeyres and Paasche average inflation rates reveals that while the two indices have generally coincided during normal times, the Paasche index-based inflation rate has consistently been higher than the Laspeyres measure since inflation began to rise. This puzzling result highlights the exceptional nature of the recent inflationary context - mostly driven by energy price shocks - where income effects rather than substitution effects seem to have prevailed across Italian households.