Relative Price Changes and Households' Welfare in Italy

The entrance of Italy in the Euro area in 2001 has given rise to a wide debate about the perception of inflation on households' well-being. However, most of the debate has involved the measurement of the correct consumer price index at the national level. Much less analysis has been carried out on the distributional consequences of inflation on every household. The paper addresses this issue by performing a microsimulation analysis of the impact of inflation on Italian households in the period 19972007. It is shown that the impact of inflation has an ambiguous path over the period, with a large concentration of welfare losses around the introduction of the Euro currency. In particular, it is found that poorer and larger households are severely hurt by inflation and that the prices of gas and gasoline are largely responsible for determining the living conditions of Italian households.