Debate over inflation and incomes policy

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In October 2003, an upturn in inflation has sparked debate between the Italian social partners on its structural causes and how it can be brought back into line with the forecast rate of inflation. The Ministry of Production Activities has begun consultations with the social partners and consumers’ organisations in order to draw up intervention measures. From the point of view of industrial relations, the main issue is the future of the incomes policy system.

At the beginning of October 2003, the Italian Institute of Statistics (Istituto italiano di statistica, Istat) released data on inflation for September 2003, which put it at 2.8% on an annual basis. In September, the overall price index recorded particularly marked short-term increases (ie compared with August) in the prices of education, communications and foodstuffs. Foodstuffs represent a crucial sector because price rises have been constant since May 2003, especially for vegetables (a 10.2% increase on an annual basis) and fruit (6.7%), and the overall increase has been 4% on an annual basis. The Istat statistics also show that local administrations have played a major role in fuelling inflation: between August 2002 and August 2003, local transport services, secondary education, waste disposal, and all services whose costs are fixed at local level increased by 3.6%. As regards production prices, Istat instead reports a slowdown in August, when increases were 0.2% over the month, and the annual rate of increase steadied at 1.3% (as in July).

According to a speech made to the Senate by the president of Istat, Luigi Buggeri, during a hearing on the budget law for 2003, on top of the 2.8% inflation rate a further 3.2% increase might be added, due to the practice of rounding up the euro to the value of ITL 2,000, rather than to the correct conversion rate of ITL 1,936.27. According to the president of Istat, this rounding-up process has given rise to the unexpected (and unwanted) effect that, in Italy, perceived inflation can be estimated at around 6%.

Such a high rate of perceived inflation is matched by another significant trend: in the past year in Italy, the gap between prices and wages has continued to widen. In the second quarter of 2003, the Istat figures show that gross pay levels increased by 2.2% with respect to the second quarter of the previous year, as against an average price increase of 2.8%, whereas in the first quarter of 2003 wages rose by 0.8% compared with inflation of 2.7%. According to the incomes policy system set out in the national tripartite agreement of 23 July 1993 (IT9709212F), the pay rises established by sectoral agreements cannot exceed the forecast inflation rate set by the government (currently fixed at 1.7%). In order to protect the purchasing power of pay, the tripartite agreement also provided that every two years (this being the duration of national collective agreements as regards their economic part) industry-wide bargaining should recoup gaps between forecast inflation and actual inflation in the two previous years. The working of this recovery mechanism (non-automatic and influenced by external factors) and the definition of the forecast inflation rate have recently sparked heated debate among all the parties concerned.

Positions of the government and social partners

In order to discuss the general upturn in prices, in early October the minister of production activities, Antonio Marzano, convened talks with the employers’ associations, trade unions and consumers’ associations. During the discussions, the representatives of the government would not contemplate any change to the forecast inflation rate, but put forward a varied package of proposals: national and local tariffs linked to the forecast inflation rate; price labels supervised by the Financial Police (Guardia di Finanza); a basket of staple goods whose prices would be restrained by 'inter-category' agreements; and a draft plan for cooperation with the regional authorities responsible for commercial policies to introduce greater competition in the retail sector.

The trade unions’ main criticisms centred on the government’s erroneous inflation forecasts. The general secretary of the General Confederation of Italian Workers (Confederazione Generale Italiana del Lavoro, Cgil), Guglielmo Epifani, stressed that a 2.8% inflation rate widens Italy’s differential with respect to the EU average and consequently reduces the competitiveness of Italian industry. He therefore urged that incomes policy be redefined, given that the pay/prices gap is continuing to widen and real pay is no longer increasing. According to Mr Epifani, 'today the bases for the 1993 agreement no longer exist, mainly due to the government’s faults', which include 'the absence of fiscal measures to protect pensions and low-incomes'. Furthermore, Savino Pezzotta, the general secretary of the Italian Confederation of Workers' Unions (Confederazione Italiana Sindacati Lavoratori, Cisl), urged that the forecast inflation rate should be revised, arguing that inflation systematically above the EU average, and also in excess of pay rises, on the one hand undermines incomes policy and wage restraint, and on the other weakens the purchasing power of families, with harmful effects on consumption. In this regard, the general secretary of the Union of Italian Workers (Unione Italiana del Lavoro, Uil), Luigi Angeletti, suggested that incomes policy should refer to the EU inflation rate and dismissed all the other measures to dampen prices as simple corollaries.

According to Stefano Parisi, the general director of Confindustria, the major Italian employers’ association, 'the inflation figures for September once again raise the problem of distribution, given the differences between production and final prices'. Mr Parisi’s statement seemingly blamed price increases on shopkeepers and 'exonerated' the production sector. As regards the steep increases in food prices, the Italian Farmers’ Confederation (Confederazione italiana agricoltori, Cia) has launched a series of initiatives to foster dialogue along the entire agro-food 'value chain', thereby guaranteeing complete transparency and protecting consumers. According to Cia, one of the main causes of constant price rises is the inefficiency of the distribution system, which involves six to seven transfers of goods before they reach the retailer.

The accusation that price rises are mainly the fault of shopkeepers was rebutted by Sergio Billé, president of the largest trade association, Confcommercio, who cited figures from the association’s research department to argue that the factors most responsible for inflation are fiscal pressure, due to a bureaucracy still too bloated for any slimming down of tax burdens on retail firms, as well as a generalised rise in wholesale prices and in the costs of banking and insurance services.

Finally, the consumers’ associations joined the animated discussion on inflation by apportioning their own blame. Numerous consumer protection organisations - most notably Codacons, Adusbef, Federconsumatori and Intesaconsumatori- have staged public protests against spiralling prices and have sought to sensitise the government coalition parties to the problem, pressing for talks to begin with all the parties concerned. Numerous proposals have been put forward, among them the creation of a 'controlled-price' basket of essential goods, the introduction of 'double price labels' stating both wholesale and retail prices, to guarantee transparency, as well as a campaign of discounts to be realised just before Christmas, in order to preserve the purchasing value of workers' '13th month' payments.

Commentary

After a period when a constant and significant fall in inflation prompted fears of an incomes policy crisis due to reduced margins for manoeuvre in wage bargaining, it seems that the system is now under pressure because of the resumption of inflation and the apparent inability to keep it under control. More specifically, the problems arise from the difference between forecast inflation – which is the benchmark used to set the ceiling for pay agreement renewals – and real inflation. This difference, in fact, if it cannot be recouped ex post, represents a progressive erosion of the purchasing power of pay.

The linkage between forecast inflation and pay increases is crucial for the entire incomes policy system, because it enables inflationary expectations to be kept under control. However, as stated by the July 1993 agreement, it requires that all the parties must adopt 'behaviours, bargaining and wage policies coherent with the objectives of expected inflation'. In particular it requires 'enterprise owners, including the state and the public bodies which own firms', to take measures 'to contain prices within the limits set by incomes policy'. If instead the expected inflation rate is no longer credible, as has been the case for at least the past two years, opportunistic 'free-riding' behaviour may arise and destabilise an incomes policy system appreciated by all the social actors and which has enabled achievement of important inflation-reduction objectives. A further problem seems to be the erosion of trust in official statistics on inflation: almost all the parties are critical and present their own figures. The lack of trust and the absence of a common reference may make efforts to maintain 'virtuous' behaviours even more difficult.

A gap between pay increases and real inflation is only sustainable in the short run if it brings improvement in the economic situation and revives growth, so that in the medium term increased productivity makes more resources available for distribution. If instead it turns into a stable feature, it becomes unacceptable, and especially for the trade unions, which witness the progressive erosion of real wages and demand that competitiveness should not be achieved and maintained solely by wage restraint, but mainly through investments and innovation. (Diego Coletto and Roberto Pedersini, Fondazione Regionale Pietro Seveso)

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