Prices on the brain
The price factor will become the early bane of the new government, whoever wins the coming general election. The price indices have generally followed a downward path in recent years, enabling Malta to qualify under the Maastricht criteria to adopt the...
The price factor will become the early bane of the new government, whoever wins the coming general election. The price indices have generally followed a downward path in recent years, enabling Malta to qualify under the Maastricht criteria to adopt the euro as its national currency. In recent months, inflation has been edging upwards, with the sub-indices of the various sectors that make up both the retail and the harmonised index performing erratically but generally pointing upwards.
The way the sub-indices have been moving has generated fresh political controversy. There can be nothing controversial about the glaring fact that we are importing inflation. The global rise in the cost of energy and cereals, as well as products and edibles derived from them, has spared no one. Staid Singapore is hitting its highest inflation rate in 25 years. In December, the Financial Times reported that consumer prices in that other island state rose by a seasonally-adjusted 0.5 per cent from November, "taking annual inflation in the city-state to over a 25-year high on rising food and transport costs. From a year earlier, prices rose by 4.4 per cent from the 4.2 per cent 25-year hit in November".
That was what the island's Department of Statistics had to say on Wednesday week.
The year-to-year measure was on a month to the same month the previous year basis. As in Malta's case, the 12-month moving average was well below that figure. This is where confusion tends to appear, because newspapers - and, needless to say, political parties - use the two measurements of inflation as if they were interchangeable. They are not, although the two are linked (as is the third way).
As in the case of our National Statistics Office, the changes are reported in regard to the previous month (January over December) but on a seasonally-adjusted basis, on a month to a year-ago basis (say December 2007 over December 2006), and on a 12-month moving average basis (say January-December 2007 over January-December 2006). It is this latter measurement that is widely taken as the proper indication of inflation. But the link which sees the first two measurements reflected in the third - the moving 12-month average - takes into account all that is required.
Whichever indicator is used, the problem that all countries have is the fact that prices are bumping up. This problem creates other problems. For instance, leading central banks are having to decide whether to cut interest rates so as to stimulate demand in the face of threatening recession, or to keep rates firm in order to influence inflation downwards, which has been set as the primary duty of central banks, particularly in recent years. In fact, the job of some central bank governors depends on whether they can keep inflation within the rate set for them by their government.
In that regard, policy formulation and implementation have to deal with contradictory objectives, as inflation and rate of economic growth or slowdown fall out of synch. In our case, since we have adopted the euro as our national currency our Central Bank is no longer charged with setting the intervention interest rate to try to influence inflation.
That is now the task of the European Central Bank, which includes the views of our Central Bank Governor in its considerations. At the domestic level the government of the day has to attempt to influence prices through the fiscal mechanism.
At this stage we have our own home-grown situation. Prices are rising but fiscal policy is lax - the government has cut back income tax. Moreover, the opposition and government-in-waiting promises to cut it back further, by exempting overtime earnings from income tax.
My guess is that, whichever side wins the general election, the new government will have to rethink its policies in regard to both fiscal policy and prices. It may be that if prices rise as a result of imported inflation, the (new) government will feel that it is correct to offset the decline in purchasing power by loosening fiscal policy.
The impact on the current account of the balance of payments will need to be taken into account the more that comes about.
The new government will focus sharply on prices. The Gonzi government is trying to turn the National Euro Changeover Committee (NECC) into the prices agency the MLP has promised to set up should it win power at the next election.
If the next government is again led by Lawrence Gonzi, he will have to rethink the terms of reference and formation of the NECC. If it is Alfred Sant who moves into the saddle, he too will have to rethink whether it will be enough for his new prices agency to report every six months.
Whatever can be done to try - and try is the correct word - to influence prices downwards, it has to be done on an ongoing basis, with naming and shaming almost daily at the heart of it, once both sides agree that price control will not work.
Competition is keen in many sectors and that should keep prices close to the bone. But there remain quasi-monopolies which have to be observed and addressed in a loud voice, not least in medicines. The new government will also have to address the phenomenon whereby some prices are reportedly rising faster in Malta than they are doing in the rest of the EU. That is already being noted and a degree of action applied in regard to medicinal products. It would seem that such action is not enough.
The prices issue will be a main political theme in the general election campaign. It will be a bigger challenge for the government elected through that campaign.
The way the sub-indices have been moving has generated fresh political controversy. There can be nothing controversial about the glaring fact that we are importing inflation. The global rise in the cost of energy and cereals, as well as products and edibles derived from them, has spared no one. Staid Singapore is hitting its highest inflation rate in 25 years. In December, the Financial Times reported that consumer prices in that other island state rose by a seasonally-adjusted 0.5 per cent from November, "taking annual inflation in the city-state to over a 25-year high on rising food and transport costs. From a year earlier, prices rose by 4.4 per cent from the 4.2 per cent 25-year hit in November".
That was what the island's Department of Statistics had to say on Wednesday week.
The year-to-year measure was on a month to the same month the previous year basis. As in Malta's case, the 12-month moving average was well below that figure. This is where confusion tends to appear, because newspapers - and, needless to say, political parties - use the two measurements of inflation as if they were interchangeable. They are not, although the two are linked (as is the third way).
As in the case of our National Statistics Office, the changes are reported in regard to the previous month (January over December) but on a seasonally-adjusted basis, on a month to a year-ago basis (say December 2007 over December 2006), and on a 12-month moving average basis (say January-December 2007 over January-December 2006). It is this latter measurement that is widely taken as the proper indication of inflation. But the link which sees the first two measurements reflected in the third - the moving 12-month average - takes into account all that is required.
Whichever indicator is used, the problem that all countries have is the fact that prices are bumping up. This problem creates other problems. For instance, leading central banks are having to decide whether to cut interest rates so as to stimulate demand in the face of threatening recession, or to keep rates firm in order to influence inflation downwards, which has been set as the primary duty of central banks, particularly in recent years. In fact, the job of some central bank governors depends on whether they can keep inflation within the rate set for them by their government.
In that regard, policy formulation and implementation have to deal with contradictory objectives, as inflation and rate of economic growth or slowdown fall out of synch. In our case, since we have adopted the euro as our national currency our Central Bank is no longer charged with setting the intervention interest rate to try to influence inflation.
That is now the task of the European Central Bank, which includes the views of our Central Bank Governor in its considerations. At the domestic level the government of the day has to attempt to influence prices through the fiscal mechanism.
At this stage we have our own home-grown situation. Prices are rising but fiscal policy is lax - the government has cut back income tax. Moreover, the opposition and government-in-waiting promises to cut it back further, by exempting overtime earnings from income tax.
My guess is that, whichever side wins the general election, the new government will have to rethink its policies in regard to both fiscal policy and prices. It may be that if prices rise as a result of imported inflation, the (new) government will feel that it is correct to offset the decline in purchasing power by loosening fiscal policy.
The impact on the current account of the balance of payments will need to be taken into account the more that comes about.
The new government will focus sharply on prices. The Gonzi government is trying to turn the National Euro Changeover Committee (NECC) into the prices agency the MLP has promised to set up should it win power at the next election.
If the next government is again led by Lawrence Gonzi, he will have to rethink the terms of reference and formation of the NECC. If it is Alfred Sant who moves into the saddle, he too will have to rethink whether it will be enough for his new prices agency to report every six months.
Whatever can be done to try - and try is the correct word - to influence prices downwards, it has to be done on an ongoing basis, with naming and shaming almost daily at the heart of it, once both sides agree that price control will not work.
Competition is keen in many sectors and that should keep prices close to the bone. But there remain quasi-monopolies which have to be observed and addressed in a loud voice, not least in medicines. The new government will also have to address the phenomenon whereby some prices are reportedly rising faster in Malta than they are doing in the rest of the EU. That is already being noted and a degree of action applied in regard to medicinal products. It would seem that such action is not enough.
The prices issue will be a main political theme in the general election campaign. It will be a bigger challenge for the government elected through that campaign.