Euro adoption - Governor draws distinction between inflation and perceived inflation
The Governor of the Central Bank has lamented that some important messages about the adoption of the euro are still not being filtered down to the man on the street."There are many things in my presentation that are not new but which bear repeating,"...
The Governor of the Central Bank has lamented that some important messages about the adoption of the euro are still not being filtered down to the man on the street.
"There are many things in my presentation that are not new but which bear repeating," Michael Bonello said during a talk organised by the Strickland Foundation last week.
His speech covered various points that he has raised in the past, including the need for Malta to become more competitive by having lower unit production costs, pointing out that the government would have hardly any monetary and fiscal tools at its disposal should the economy face any shocks. "You have to be more cost-effective and you have to allocate scarce resources to areas that will give long-term growth. So there is more scope for means testing," he said, repeating the need for stipends to be seen in this context.
He also repeated his plea for all the social partners to work together to bring down unit costs, saying that there were two ways to do this: either cut wages or improve productivity.
"As wages have not been going up in real terms, we clearly need to produce more."
Mr Bonello said inflation was obviously a major concern as the main fear of EU citizens was that euro adoption would push up prices. Mr Bonello said that the euro had actually controlled inflation in the eurozone and kept it to around two per cent, considered to be the price stability level. In spite of perceived inflation at the time of the euro adoption in 2002, people eventually realised that the inflation rate was actually much lower than perceived and in fact when surveyed recently, people expected that inflation in five-years' time would still be around two per cent.
Italy had the highest levels of perceived inflation. Mr Bonello said that people tended to use a rule of thumb to help them with their mental arithmetic. In Italy, where the conversion rate was LIT1,936.27, rounding it up to LIT2,000 meant an increase of 3.29 per cent.
Of course, some prices did go up, all too often on frequently purchased items. Even though the amounts involved were small - for example, the cost of a cup of coffee - because they are bought often, the perception sticks disproportionately. However, Mr Bonello said, such small items had very little weighting in the overall inflation rate. The EU carried out a survey to establish whether there was in fact any correlation between the cost of these frequently purchased items and of perceived inflation and found a near perfect fit.
"There are many things in my presentation that are not new but which bear repeating," Michael Bonello said during a talk organised by the Strickland Foundation last week.
His speech covered various points that he has raised in the past, including the need for Malta to become more competitive by having lower unit production costs, pointing out that the government would have hardly any monetary and fiscal tools at its disposal should the economy face any shocks. "You have to be more cost-effective and you have to allocate scarce resources to areas that will give long-term growth. So there is more scope for means testing," he said, repeating the need for stipends to be seen in this context.
He also repeated his plea for all the social partners to work together to bring down unit costs, saying that there were two ways to do this: either cut wages or improve productivity.
"As wages have not been going up in real terms, we clearly need to produce more."
Mr Bonello said inflation was obviously a major concern as the main fear of EU citizens was that euro adoption would push up prices. Mr Bonello said that the euro had actually controlled inflation in the eurozone and kept it to around two per cent, considered to be the price stability level. In spite of perceived inflation at the time of the euro adoption in 2002, people eventually realised that the inflation rate was actually much lower than perceived and in fact when surveyed recently, people expected that inflation in five-years' time would still be around two per cent.
Italy had the highest levels of perceived inflation. Mr Bonello said that people tended to use a rule of thumb to help them with their mental arithmetic. In Italy, where the conversion rate was LIT1,936.27, rounding it up to LIT2,000 meant an increase of 3.29 per cent.
Of course, some prices did go up, all too often on frequently purchased items. Even though the amounts involved were small - for example, the cost of a cup of coffee - because they are bought often, the perception sticks disproportionately. However, Mr Bonello said, such small items had very little weighting in the overall inflation rate. The EU carried out a survey to establish whether there was in fact any correlation between the cost of these frequently purchased items and of perceived inflation and found a near perfect fit.