Aug. 28 (Bloomberg) -- Matteo Tosato saw deflation coming months ago as he hauled his traveling fruit and vegetable stand to outdoor markets around the northern Italian city of Padua while his country slid back into recession.
“Wherever a factory closed down and people got fired, demand collapsed and I had to lower prices to keep my business running,” said Tosato, 38, who sells peaches, apples, carrots and other farm-fresh goods in as many as four town squares a week.
Tosato says his cuts have been as much as 30 percent to 40 percent compared with last year. Across Italy, prices are dropping for everything from food to hotels and clothing, leading economists in a Bloomberg survey to predict the country, already in its third economic slump since 2008, is about to join Greece, Spain and Portugal in recording annual consumer-price declines.
Weakening prices across the euro area are ratcheting up pressure on European Central Bank President Mario Draghi to do more to spur inflation and the euro region’s sputtering economy. Draghi said last week that policy makers will use “all the available instruments needed to ensure price stability.” Key inflation figures are due this week.
Italian consumer prices probably fell 0.1 percent in August from a year earlier, according to a survey of 12 economists before a report in Rome tomorrow. That would be the first decline in five years. Euro-area data scheduled to be released at the same time may show inflation in the 18-nation bloc slowed to 0.3 percent this month from 0.4 percent, a separate poll showed. That compares with the ECB’s goal of close to 2 percent.
Consumer prices in Spain fell 0.5 percent in August from a year ago, the sharpest decline since Oct. 2009, even as the economy expanded 0.6 percent in the second quarter.
Euro-area economic confidence declined more than economists predicted in August. An index of executive and consumer sentiment fell to 100.6 from a revised 102.1 in July, the European Commission in Brussels said today. The median forecast in a Bloomberg News survey of 25 economists was for a drop to 101.5.
The euro area’s recovery stalled in the second quarter as not only Italy, but also Germany and France failed to grow.
Paired with increasing risks from geopolitical tensions, chiefly from Ukraine, any further fall in consumer prices could cast doubt on Draghi’s projection of a continued moderate pickup.
Draghi indicated at last week’s Federal Reserve Bank of Kansas City symposium that he may boost stimulus amid concerns about falling inflation expectations that could affect actual inflation as investors, consumers and companies pull back spending in anticipation of even weaker prices. That could tip Europe into a deflationary spiral that would be hard to reverse.
Even an unexpected acceleration of euro-area inflation may do little to assuage the ECB’s concerns. The most optimistic forecast in a Bloomberg survey is for a consumer-price increase of 0.5 percent, a quarter of the ECB’s goal.
Italy entered a new slump in the second quarter as gross domestic product fell 0.2 percent, according to a preliminary report released Aug. 6. The euro-region’s third-biggest economy has contracted in all but one of the last 12 quarters.
Tomorrow Rome-based statistics agency Istat will also release the unemployment rate for July and the final GDP report for the second quarter.
“We expect the inflation rate to go negative in August and to stay modestly below zero until early next year,” Raffaella Tenconi, an economist at Bank of America Merrill Lynch in London, said by e-mail. “There is a significant risk that inflation will stay in negative territory through the end of next year.”
Consumer confidence in Italy fell more than forecast in August as households grew concerned about the outlook for the economy and unemployment, Istat said yesterday. Most consumers said they don’t expect prices to rise over the next year, the report said.
“Falling food prices are the outcome of a recessive spiral of deflation and consumption that prompted two families out of three to cut quality and quantity of purchased food,” the country’s Coldiretti farmers’ union said in a report last month. It said that in July more than 80 percent of Italian households kept eating food “after its expiry date, 18 percent more than in January.”
Back in Padua, Tosato says he never saw a crisis like the current one in the 15 years he has worked in the family business that gets him out of bed each working day at 3 a.m. to buy his fruits and vegetables at the wholesale market. Tosato says his customer numbers have dropped by 10 percent and his profit margins by 30 percent.
Tosato said in a telephone interview that he remembers Prime Minister Matteo Renzi’s February promise to pay “attention to neighborhood markets as well as financial markets.”
“Six months later, I fear that it was just a catchy phrase and there is no way he can revive consumption in Italy,” the traveling seller said.
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