One of the functions of any government is to ensure price stability. This essentially means that inflation does not spiral out of control, rendering businesses uncompetitive and endangering social cohesion. Economists speak of the need to have a sustainable level of inflation. Maintaining price stability is also one of the functions of the central banks in general.

Essentially price stability leads to higher levels of economic activity and employment because it allows consumers and investors to make better informed consumption and investment decisions, thereby contributing to a more efficient use of resources.

It is worth noting that the desire is not to have zero inflation but to have a sustainable level of inflation. In the eurozone this is currently assessed to be at two per cent. In fact this has been a major headache for eurozone central bankers as for the last years, the inflation rate has been well below the two per cent level, albeit that it has not been the same in all countries.

The inflation rate in an economy is the result of a number of internal and external factors. A great deal depends on the extent to which a country relies on imports. This is the case of Malta, whose imports reach 130 per cent of its gross domestic product. So an important component of our inflation rate is imported inflation.

Another interesting indicator is that the increase in the retail price index for food is 2.66 per cent, double the rate for the whole basket

Then there is the internal component of inflation, which is mainly the result of services provided locally, property prices, the level of domestic demand, the prices of local agricultural produce, and other elements. The internally-generated inflation is more worrying for a country like Malta as it then ends up being reflected in the prices of the goods and services that we export.

It is therefore worth assessing the inflation trends in an economy, and what is generating that inflation over the years. The measurement is based on the retail price index, which is then subdivided into various subgroups of goods and services.

The weighting given to each subgroup is based on the level of expenditure made by households on each of them over a 12-month period. The retail price index focuses solely on private households, and excludes institutional households and foreign visitors.

The 12-month moving average rate of inflation stood at 1.30 per cent in October 2017. It is the tenth successive increase since December 2016. Inflation can be susceptible to one-off events, which one tries to isolate when assessing data – hence the use of the 12-month moving average rate.

In October 2016, it stood at 0.66 per cent and in 2015 it stood at 1.02 per cent. Going back further in years, one notes that it was 1.76 per cent in 2013 and 0.96 per cent in 2010. If one calculates a simple average of the rate for the period 2010 – 2017 (so eight years of data and calculating an average of averages), one notes that the 12-month average rate of inflation was 1.39 per cent per year.

Thus the current rate of inflation is slightly below this average of averages. This certainly indicates a good level of price stability in our economy.

Another interesting indicator is that the increase in the retail price index for food is 2.66 per cent, double the rate for the whole basket. The increase in the index for household equipment and house maintenance costs is 3.09 per cent. These are two subgroups where the domestic component, which I referred to earlier on, plays an important part.

In this brief assessment of inflation trends one does note that the rate of inflation is fairly under control. However the domestically induced rate of inflation needs to be kept under watch, as a higher rate when compared to the total rate, could indicate an economy that may be overheating.