Malta’s inflation rate is slowly returning to levels which are closer to the historical average. Last December Malta’s inflation rate went down to 3.7%. A year earlier the digits were reversed, and inflation had been 7.3%.
In contrast, the inflation decline in the EU has been much stronger, from 10.4% in December 2022 to 3.4% last December, while in the euro area the decline was from 9.2% to 2.9%. In part this reflects the very rapid deterioration in economic activity across Europe, but there are other factors at play to explain the deviation between the Maltese and foreign inflation rates.
The main one is the diverging path of food inflation. While food inflation across the EU peaked at a much higher rate than Malta in early 2023, it has since fallen dramatically. This is so much so that, while in March 2023 food inflation in the EU was one and a half times that in Malta, it closed the year at nearly half the Maltese rate.
Food inflation in Malta has a historical tendency of lagging behind that experienced abroad. While it tends not to peak as much as in the rest of Europe, it then exbihits much more protracted persistence. For instance, while the 2008 food price spike raised inflation in the EU for just a year, in Malta the effect was three times longer. A similar thing occurred after the 2011 spike.
It is this persistence that led to the actions of the Maltese government to try to shortcut this tendency. By acting directly on 15 essential food categories, the administration is trying to reverse this secular tendency of food price inflation in Malta to persist long after inflationary pressures have subsided elsewhere.
An analysis by the National Statistics Office (NSO) indicates that food inflation accounts for 1.7 percentage points of Malta’s inflation rate. This means that nearly half the overall inflation is due to this element. Cutting the food price inflation rate would bring Malta’s inflation back below the EU average.
The combined weight of the food items affected by the Government price stability scheme is considerable and the discount offered is also significant. By some accounts, it could wipe off half of the current contribution of food inflation to overall inflation.
With inflationary pressure in other items subsiding, the hope is that this scheme will play a fundamental role in the disinflationary process in Malta. Combined with the widening of the additional COLA mechanism and the increase in benefits and the minimum wage, this measure should play a key role in winning the fight against inflation.