The distributional and welfare impact of inflation 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 national level. Much less analysis has been carried out on the microeconomic consequences of inflation on every household and to the investigation of its distributional impact. This paper addresses this issue by performing a microsimulation analysis of the impact of inflation on Italian households in the period 1997-2007. The extension of the study allows to capture possible structural breaks in correspondence of the adoption of the euro currency in 2001, and to get insightful information on the persistence of either positive or negative impacts. All methods of investigation proposed in this paper show that the impact of inflation has an ambiguous path over the period, yet a large concentration of welfare losses is found in the period surrounding the introduction of the euro currency. In particular, poorer and larger households are found to be severely hurt by inflation and a closer inspection suggests that the prices of gas and gasoline are largely responsible in determining living conditions of Italian households in both the period around the introduction of the euro and over the decade.