Several commentators and sell-side analysts have recently argued that “Italians (or French, or Germans) are eating less because of inflation” (for instance, see here or here or here). In reality, at most, Italians have cut their consumption by 7 Euros per person per month (that is, nothing). The erroneous claim is based on the behavior of the households’ real final consumption expenditure on “Food & Non-Alcoholic Beverages” which has plummeted. In reality, two thirds of the drop reflect the increase in tourism. Correcting for that, real per capita consumption on food of Italian residents is roughly stable. Translated: the claim that “Italians are eating less because of inflation” is, at best, unsubstantiated.
In this note, we focus on Italian data. Similar conclusions apply to other EA countries.
The facts
Aggregate food consumption in Italy has plummeted. Figure 1 shows the evolution of the real households’ consumption expenditure on “Food and Non-Alcoholic Beverages” in Italy (last observation: 2022:Q4). Since the beginning of 2022, real aggregate consumption on food has contracted sharply. At the end of 2022, the YoY posted -6%, the largest contraction of last 30 years. However, can we conclude that “Italians are eating less because of inflation” based on Figure 1? Not really.
Figure 1. Final Real Consumption Expenditure of Italian Households on “Food and Non-Alcoholic Beverages”
The National Accounts
The higher the number (and expenditure of) tourists, the lower is aggregate “C” in the GDP. The aggregate private consumption in the national accounts (the “C” in the GDP formula) is calculated as a sum of three components: (i) consumption of residents at home PLUS (ii) consumption of residents abroad, and MINUS (iii) consumption of non-residents at home. (ii) and (iii) need to be added and subtracted because they are an import and an export, respectively. If the reader is not familiar with how ISTAT (and the other NSIs) compile the “C” of the GDP, we report in Figure 2 the relevant screenshot from ISTAT (National Accounts webpage is here, the Excel file can be downloaded here).
Figure 2. Details of Households Real Final Consumption Expenditures (ISTAT)
It follows that the evidence in Figure 1 can be taken as a proxy for “how much Italians eat” IF and only IF the number of tourists (and their real spending) is roughly constant. Needless to say, the number of tourists has contracted violently during Covid before rebounding. Therefore, in order to estimate the consumption on food of residents in Italy (“how much Italians eat”) one has to correct for the large swings in expenditures of tourists in Italy. Not only, but because the level of the Italian population is falling (chart here), one should look at the per capita values rather than at the aggregate ones. Unfortunately, ISTAT publishes only the aggregate spending of non-residents in Italy (highlighted in yellow in Figure 2) but not the details by spending category. In other words, we know how much tourists spend in Italy but not how much they spend on food specifically. Nevertheless, under the assumption that the share (call it X%) of spending of tourists in Italy on food is constant (say a third of total spending), one can back out the per capita consumption on food of Italian residents (= total “C” on food plus X% of tourists spending in Italy, divided by total number of residents).
Italians have cut their real per capita consumption by about 2%. It is 7 Euros per month per person. Figure 3 shows the YoY changes of final real consumption expenditure (the yellow line) and of final real per capita consumption expenditure of residents (the blue line) on “food and non-alcoholic beverages”. The yellow line is what most people have focused on, while the blue line reflects “how much Italians are eating”. As Figure 3 shows, the two lines used to move together. However, since Covid they diverged. In 2020, both Italian residents and tourists cut their spending (Italians could not eat out, and tourists could not travel). The net effect of the two was roughly zero in aggregate. For this reason, in 2020 the YoY of the yellow line in Figure 3 is close to zero, while the blue line posted a -7%. With the reopening, the opposite happened: the blue line switched sign and the yellow line remained close to zero (again, the increase in spending by tourists offset the increase by Italian residents). Finally, in the last year Italians have started to cut somewhat their spending (-2%). The aggregate “C” on food has contracted (-6%) much more than the blue line because the spending of tourists has continued to increase (chart here). For the record, the 2% cut in Figure 3 is equivalent to about 20 Euros per person per quarter (about 7 Euros per month per capita). In other words, this is far from a starving crisis. The level of per capita spending on food, quarterly values, can be seen here. In this note we cannot discuss the distributional effects of inflation, especially of food items. We simply show that the claim “Italians (or French, or Germans) are eating less because of inflation” is an unsubstantiated claim based on a poor understanding of the data, especially considering that (i) aggregate (extra) households savings are much higher than pre-Covid, and (ii) total nominal wage bill (compensation of employees) moved 1:1 with headline CPI (no real wage cut in aggregate).
Figure 3. Final (Real) Consumption Expenditure and Final (Real) Per Capita Consumption Expenditure of Residents on Food and Non-Alcoholic Beverages – YoY changes (%)
(A technical note. National accounts in the Euro area are compiled following the European System of Accounts (Chapter 10 on price and volume measures is here). The main issue is that the price index is an implicit price deflator (Paasche price index), while the volume index is calculated using a Laspeyres index of quantities in which each basic index is weighted by the proportion of the basic product in the overall value of the base period. The suspect is that, given the shock to the price level and given the likely upper/lower-level substitution biases (which are not captured by official statistics), the indexes are underestimating both the price level and the volume level. As such, the 7 Euro per month per person is possibly an upperbound estimate of the consumption cut on food by Italian households).
Conclusion
For now, Italians are not starving. In this note, we have been silent about the distributional effects of food inflation, which are nevertheless very relevant. We defer the discussion to other notes. The takeaway of this analysis is that most of the claims in this moment tend to be exaggerated by the distortions of the data. We have presented one case of such (big) distortion. Fortunately, the reality of food consumption in Italy is far away from what most people conclude by looking at Figure 1. And yes, we do see the slowdown of the economy, but as usual, the devil is in the details.