How inflation is measured
Let's make this clear: measuring inflation is not simple, as inflation is a general increase in prices, which refers to a large number of goods and services that represent households' spending behaviours.
This is why inflation is measured with a consumer price index, an average of the prices of a set number of goods and services called a basket, which is the Italians' shopping cart! The average is weighted by taking into account the varying degrees of importance of the goods and services in the total amount we pay. Variations in the index correspond to a generalized variation in prices, which means inflation (if there is an increase) or deflation (if there is a decrease).
If we read that, in November 2022, the inflation rate in Italy was 12.5 per cent on an annual basis, that means that between November 2021 and November 2022, the average of the prices of the goods and services in the basket increased by 12.5 per cent.
In Italy, the National Institute of Statistics (ISTAT) is tasked with keeping the basket up to date, assessing the price indices and calculating inflation on a monthly basis.
ISTAT produces three different indices:
- the Consumer price Index for the whole Nation (NIC);
- the Consumer price index for blue and white-collar worker households (FOI);
- the Harmonized Index of Consumer Prices (HICP).
The reason why three different indices are needed is that inflation is not the same for everyone, as it depends on different households' spending behaviours. Therefore, statistics institutes produce different indices for different categories of people. The harmonized index, on the other hand, is produced in order to aggregate and compare the data on Italian inflation with those of other euro-area countries.
Finally, there are consumer price indices based on baskets that exclude specific goods and services whose prices show significant fluctuations. These are typically groceries - whose prices are affected by the climate, as well as energy products, such as petrol and diesel oil. The inflation rate that is calculated through indices that don't take into account such products is called core inflation, (inflazione di fondo in Italian) and can provide economists with extremely useful information for distinguishing between sporadic changes in the prices of certain goods, and a more generalized price increase or decrease.