Many analysts across major economies, while welcoming the onset of the post-COVID recovery, are sounding some caution. Their main concern is the so-called “return of inflation”.
This concern is spooking most financial markets, as traders worry that Central Banks will tighten monetary policy if they sense that price pressures are spiralling out of control. The impact of such tightening, particularly through higher interest rates, would have a dramatic impact on economic activity. This because the pandemic has made many governments, firms and households increase greatly their borrowing. Higher debt servicing costs would result in governments withdrawing their stimulus programmes, firms cutting their investment plans and households rethinkingtheir spending. In short, a rise in inflation could cause the post-COVID recovery to sputter out.
Central Bankers have been emphatically arguing that the rise in inflation is nothing to be worried about. To a large extent the acceleration appears temporary, linked to a resurgence of oil prices to pre-COVID levels and to bottlenecks in supply chains. In a recent blogpost, ECB Chief Economist Philip Lane claimed that “The medium-term outlook for inflation remains subdued, amid weak demand and substantial slack in labour and product markets, with the staff projections foreseeing only a very gradual increase in price pressures: inflation is projected to reach only 1.4% by 2023.”
In the case of Malta, inflationary pressures appear quite subdued at present. In June, Malta featured at the very bottom of inflation rates across the EU. This reading may be somewhat biased by the fact that the inflation measure adopted for EU comparisons gives a lot of weight to goods and services consumed by tourists, and these fell sharply in recent months.
In June, Malta featured at the very bottom of inflation rates across the EU.
So, it makes more sense to look at the Retail Price Index, which focuses more on the consumption of Maltese and Gozitan residents. This shows that in June there was an inflation rate of just 0.5%, the lowest reading since early 2015. To give an idea of how low this reading is, consider that in all the previous three PN-led administrations, inflation never fell to this rate. The lowest rate that had been observed was 1.3%, or two and a half times the current inflation rate.
In June 2009 during the peak of the post-financial crash Maltese households had to face an inflation rate of 4.2%. The increase in the cost of living was eight times what it has been in the last twelve months. Moreover, it was not concentrated in luxuries or services that households could decide not to consume. Food prices were rising by a whopping 8.6%, the highest on record. At the time, the GRTU, now the Malta Chamber for Small and Medium Enterprises had attributed this to “incompetence and inefficiencies in the country”, the “failure of the privatisation of the harbour, the freeport and the airport” and “particular sectors which are choking in time worn practices, such as the systems operating at the vegetable and fish markets, the pitkalija and the pixkerija”.
Then there was the issue of electricity, water, gas, and fuel. Here a Nationalist Government, blaming rising international oil prices, had shot up prices, shifting the burden on families and businesses. Today we all know it was all a sham. The average rise in prices across the Euro area was four times less the rise observed in Malta. Facing the same rise in international oil prices as the Maltese Government, others increased prices by a quarter of what Maltese and Gozitan households and businesses had to endure.
This June, the situation looked very different. Government stood by businesses and households, supporting them with lower costs and assistance, and not trying to extract as much money as possible. Malta remains the only place in Europe where fuel prices have not risen. Energy prices have been on the rise across the Euro area, while here they are stable. The rising international price of oil was only one factor. As the ECB has amply documented “the strengthening of energy inflation in early 2021 reflected not only oil price developments but also changes in taxes and other surcharges”. Tax measures enacted in Germany alone are estimated to have pushed energy inflation in the Euro area by nearly one percentage point.
In Malta there has been no such impact. Whereas in 2009 the Nationalist Government, blaming the rising price of oil,had increased prices by far more than was warranted, damaging our economy in the process, this time round, theLabour administration has shouldered all the impact of rising international fuel prices. The impact goes beyond the transport and the utilities sub-indices. When the prices of these essential items rise, they affect all the other sub-indices. So, keeping these prices under control leads to other prices remaining under control.
And with inflation under control, households and businesses feel reassured to spend and invest, thus fuelling domestic demand and driving the recovery of our economy.