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Giulio Zanella has a nice post on noisefromamerika, dissecting the sources of Italian deflation. (In Italian, but Google translate does a pretty good job.) Deflation can come from lack of "demand," or from technical innovation and increases in supply. What do the data suggest?

The right hand column gives inflation by category. "Beni Alimentari" are food, +0.1%, "Beni Energetici" is energy, -2.8%. "Beni Durevoli" is durable goods, -0.4% and "nondurevoli", duh, nondurable goods at +0.7%. The services are all positive, except communications services

(click to enlarge)

The message, suggests Giulio, is pretty clear. What's going down? Tradeables and commodities. Oil prices and agricultural commodity prices reflect global, not Italian, supply and demand. Imported and import-competing durable prices go down. What's going up? Nontradeables and services. This looks like imported and supply deflation not lack-of-demand deflation

The subdivision goods / services is in fact for a country like Italy a good approximation of subdivision tradables ( tradables ) / non-tradable goods ( nontradables ). ... If deflation Italian was mainly due to the weakness of domestic demand, then we should observe deflation even (and especially) in the prices of services. Instead do not observe the contrary, we observe an increase of 0.6%.

And prices go down when supply curves shift out,

note the strong (6.7%) reduction in the price of communications services, a reduction that is the clearest example of deflation induced by technological innovation and, probably, competition... in a rapidly expanding and highly contestable market. [Yes, even in Italy] Multiplying this price reduction by its weight in the Istat basket, (6.7% * 1.82%), it turns out this item contributes 0.12%, a bit more than the whole of deflation.

The longer original is worth reading.

I guess the 16 euro gelato will still be with us for a while.

Source: Italian Deflation?