Bleak outlook for inflation

The 12-month average rate of inflation continued the upward climb started in September, to reach 1.79 per cent in February. That may not seem much. Looked at in another way, however, it is higher than it was a year ago, when it stood at 1.58 per cent, and two and a half times the level it had fallen to last June.

This particular rate is the measure of inflation used officially in Malta. It compares average retail prices in the last 12 months to the average 12 months earlier. The National Statistics Office also publishes two other rates – the monthly rate, expressing the change over the previous month, and the annual rate showing the change in one month over the same month in the previous year.

The 12-month average rate is used as the official rate, the NSO explains, because it overcomes the volatility of the other two rates. It is less sensitive to transient changes in (consumer) prices. The official rate covering the 12 months to September is accepted by the social partners as the basis upon which to set the statutory annual cost-of-living increase, a concept which is under criticism by the employers’ side.

The acceleration in the moving rate of inflation is not mirrored in the annual rate. This stood at 2.27 in February, down from 3.25 per cent in January and 3.25 per cent in December. Nevertheless it is very significantly above the level it was a year ago, when it had moved down to 0.30 per cent in February. Even that figure had reflected a deteriorating annual rate, which had been negative throughout the last quarter of 2009.

The components of the Retail Price Index tell a grimmer story for lower income consumers. Food has the highest weighting in the index, over a fifth which, as an average, means that lower income households spend a higher proportion of their income on it than that.

In February this year food was 4.66 per cent higher than it was a year ago. The housing sub-index rose by 5.32 per cent. Water, electricity, gas and fuels upped 3.28 per cent. Even funeral services fees were higher. In contrast, the sub-index for household equipment and household maintenance fell by 3.81 per cent.

In previous quarters sharp increases recorded in the sub-index for water, electricity gas and fuels impacted strongly on the official inflation rate. Given the effect of higher oil prices on inflation indices various countries made it more of a point to strip out the impact to look at what is referred to as the core rate of inflation.

Whether or not Malta’s National Office of Statistics eventually starts doing that as well, the main economic impact results from the full rate, which translates into higher wages/costs via the statutory cost-of-living increase awarded from January of each year.

In recent months the cost of fuel at the pump has risen sharply, in part due to higher prices of oil and its derivatives, and also due to a higher margin for petrol station owners who insisted on an increase in profit to allow them to prepare for enhancements they are expected to make soon. The retail price index for March will reflect this increase.

The social impact of a higher inflation rate is assessed by looking more closely at the sub-indices, as we did above. Such comparisons tell much more about the effect on lower income households which, because of the averaging principle, are always affected by more than the various indices show.

Sub-indices (or part of them) that cover items that are not susceptible to much personal choice whether we consume them or not are of particular importance in that regard. While vehicle density is very high in Malta, almost approximating one for every adult, car use beyond real need remains very discretionary.

It is essential water use and the heating element within the sub-index that are not discretionary. Most of us have no choice but to use water, cook and heat (much or little) our abodes. The personal care and health sub-index is also a key case. It includes medicines. There is no discretion in that area. If one needs medicines, and if one is not entitled to free drugs, one has to put up cash. That is what most individuals do.

With the official inflation rate in Malta already on an uptrend, it is expected to deteriorate in the coming months. The sharp increase in the cost of crude oil as a result of the continuing running battles in Libya and threats of uprisings elsewhere will inevitably be reflected in higher water and electricity bills soon. It remains to be seen whether the Finance Minister will, finally, agree to cushion part of that increase by cutting the tax take on fuel. Elsewhere this has been done, although it is not a measure than can be resorted to frequently.

The impact of crude oil rises aside, foodstuffs have been rising and are set to rise further. The eventual social and economic implications will be more readily understood, by economic operators who face further loss of competitiveness, and by consumers whose living standards are squeezed.

Some will offer imported inflation as a causal factor. Other causal factors, like taxation, market rigidities and insufficient real competition, may be in more evident play, call for policy redress.

Whether this will come about is another matter, especially with regard to the government’s tax take from imported fuel, given tight Budget target.