Malta has registered its third month of deflation in a row but economists say there is nothing to worry about as this is taking place in a growing economy.

The National Statistics Office yesterday reported that the cost of living in July fell by -0.05 per cent.

This was the third monthly drop in a row and is mainly the result of the government’s decision to lower the electricity and water tariffs by 25 and five per cent respectively as from the end of March. Lower air fares also contributed.

Deflation is generally seen as a bad thing. One of the reasons is because if consumers see prices going down, they might delay spending in anticipation of cheaper prices in the future. This could dampen commercial activity and several countries experiencing deflation in Europe are getting worried about the state of their economies.

There appear to be no such concerns in Malta. Economist Alfred Mifsud said Malta’s deflation was mainly due to lower utility tariffs and it was happening in a growing economy.

“Our lowering of prices is taking place in a situation where the economy is growing at a strong pace of some three per cent. This means that deflation is not a result of a weak economy,” he said. The only negative side to this trend – if it persists – is that wage growth will come to a standstill by the end of the year and workers will not receive their customary rise: the cost-of-living adjustment.

While saying that Malta’s recent deflation was a positive sign for the economy, another economist, who wished to remain anonymous, said: “The only thing is that workers will not see their salaries increase next year. But from a macroeconomic point of view that is also positive for our competitiveness,” he added.

Calculated on a full year, Malta’s inflation is still in positive territory, with the 12-month average rate standing at 0.48 in July. It is one of the lowest averages in the past five years.

Workers may not see their salaries increase next year

In the EU, deflation is being regarded as a sign of more economic trouble ahead.

With many of the member states still struggling to emerge from the recent recession there are growing fears that the EU is heading towards a new one.

According to Eurostat figures for July, Bulgaria, Greece, Portugal, Spain and Slovakia all reported deflation while their economies are at a standstill.

Inflation in the EU as a whole is at its lowest level for the past five years and economic growth is slowing down.

Official data issued last week showed that the eurozone stagnated in the second quarter, while a survey by the European Central Bank for the rest of the year suggested that growth will be much weaker than originally expected.