Italian VAT rise has no effect on inflation figures

Thu 5th Dec 2013

Retail prices continued to fall despite last month despite Italy’s VAT rise to 22% on 1 October 2013.

Italy heads into deflation

The Italian statistical institute published on Friday 27 November pricing information for Oct/Nov showing that the Consumer Prices Index had fallen by -0.4%.  This reflects the Italian economic position as the economy remains in recession after nine quarters – the longest in the Eurozone.  This, driving rising unemployment, means there is a shortage of disposable income so shop prices are in decline.

Second Italian VAT rise has limited impact

Generally, a 1% rise in VAT such as Italy’s October rise to 22% would create 1% to 2% short term inflation as retailers attempt to pass on the tax increase.  However, these latest inflation numbers show that shops are having to absorb the VAT hike and face a further squeeze on their margins. Istat estimated that there was only 0.4% inflationary impact because of the VAT rise.  This implies an actually retail prices fall of -0.8%.

Italy already raised VAT 1% in 2012 to 21% in 2011 during the Euro crisis.  The average EU VAT rate is now over 21%.