Inflation and COLA

The Labour Party is to be commended for organising a conference some weeks ago on one of the most important issues facing this country - the high annual inflation rate - which in June stood at 2.8 per cent, the highest in the eurozone. Some worrying data emerged from the presentation given by Prof. Joe Falzon. His findings revealed that prices for goods in Malta in relation to workers' hourly wages stood at 77 per cent more expensive than the EU average and furthermore, by adjusting the price levels to the hourly labour costs that stood at 44 per cent of the EU average Malta emerged as having the second highest cost of living in Europe, just after Slovakia.

The relatively high inflation rate when compared to our main trading partners is the worst recipe we can have in a time of recession. Some economists refer to this as stagflation which basically means that at a time of economic stagnation caused by the international recession you have prices going up (inflation) at the same time. Obviously this is one of the main threats that we have to our competitiveness and if it is not managed properly could result in a runaway wage-price spiral.

Unfortunately, some representatives of the employers chose the media and not the appropriate fora, the MCESD, for a revision of the COLA mechanism. The effect of this public outcry has been that trenches have been dug and positions made. This surely does not contribute towards a mature and sensible dialogue and for a compromise to be found. Instead of trying to find the root of this high inflation and pressuring government to take the necessary mitigation measures, some employers seem to reason that by removing the COLA mechanism they will solve the problem.

It's just like giving anaesthetic to a patient who suffered a car accident and that's all. Soon after the effects of the anesthetic are gone and the pain will simply come back. These are, but, short-term and short-sighted solutions and come about when panic sets in. Some call it management by crisis! Way back in October 2008, when the government presented the new utility tariffs all the social partners agreed that the MCESD was to commission a Socioeconomic Impact Assessment to measure the impact that the new utility prices will have on the economy in general, our competitiveness, inflation, the standard of living and other social considerations.

However, no sooner that some social partners left the meeting, they tried to do their own thing and met in secret with government officials to protect their patch, behind the back of the other social partners, forgetting in the process that by protecting only their patch they will be missing the woods for the trees. As a result of the confusion that followed, the much-needed Socioeconomic Impact Assessment was dead before it was even born. Had this valuable study been commissioned, perhaps, today, we would not be discussing how to tackle inflation as the appropriate mitigation measures would have been implemented then at the right time.

Now we have our backs to the wall and drastic measures are being suggested by those who failed to rise to the occasion and put the national interest before those of their sector or enterprise. At the end of the day the solution to the high inflation rate has to be found by having effective checks and balances mechanisms and reforms where these are needed. A social market economy entails that fair prices should be charged and no one (including the government) should raise prices without these being justified and transparent to the consumer. This is even more so in a small market like ours where market imperfections are not uncommon.

Finally, while the forecast is that the annual inflation rate is set to decrease but remain in positive territory, which economists term as disinflation, it is imperative to remember that this will not mean that prices will generally be going down and that the cost of living will become cheaper. This will only mean that prices have not increased further when compared to the previous quarter.

So unless the COLA adjustment is given, the standard of living of low- to medium-salaried employees, pensioners and their families will continue to deteriorate. On the other hand there are other solutions which can improve the standard of living without jeopardising the competitiveness of industry and tourism.

Here the government should lead the way by, for example, decreasing the utility and energy prices that have contributed towards the inflation we have today. Employers too have to make compromises and give guarantees. This approach will certainly pave the way for a historic agreement between all the social partners concerned.

Mr Carachi is president of the General Workers' Union