Last week’s contribution focused on inflation and the use of inflationary policies as a tool to stimulate economic activity.

I made the point that nowadays, there is general agreement that inflationary policies are a good economic stimulus only in the short term, and are very dangerous in the long term. Government expenditure should be channelled towards the enablers in the economy such as education, and directly into economic activities.

What triggered my contribution on inflation was the publication of the inflation data for April by the National Statistics Office (for Malta) and by Eurostat (for the member states of the EU).

This week, I would like to focus on the data itself as I believe we can draw some interesting conclusions. In April this year the annual rate of inflation in Malta was 2.4 per cent. This information on its own hides some good news and some bad news.

The good news is that Malta’s inflation rate is the fifth lowest in the eurozone and is the seventh lowest among the EU member states. It is also 0.4 per cent lower that the eurozone average and 0.8 per cent than the EU average. The countries that have a lower inflation rate are Ireland, Czech Republic, Sweden, Slovenia, France and The Netherlands.

It is important to note that from these countries, only Sweden has lower fiscal deficit to GDP ratio. There is some more good news as the rate of inflation in March 2011 was 2.8 per cent in Malta, thereby showing a drop of 0.4 per cent between March and April. In the eurozone only four other countries experienced a drop in the inflation rate, and only two countries (Greece and Slovenia) experienced a drop of greater than or equal to 0.4 per cent. Thus the long term trend for Malta is very favourable when compared to other countries within the eurozone. Unfortunately the good news ends here.

The monthly rate of inflation for Malta was 2.1 per cent in April this year. The average for the euro area was 0.6 per cent and the average for the whole of the EU was 0.5 per cent.

All member states of the EU showed a monthly inflation rate that was either well below one per cent or around one per cent level. This data for monthly inflation is supported by the fact that the twelve month moving average rate of inflation was the sixth highest in the Euro area at 2.7 per cent.

Moreover, our annual inflation rate trebled between April last year and April this year, as it rose from 0.8 per cent to 2.4 per cent.

Greece and Slovenia were the only two countries in the euro area to experience a fall in the rate of inflation in this twelve month period, but only Ireland, Slovakia, Portugal and The Netherlands had an increase in the rate, higher that of Malta.

These numbers are the result of composite indices which differ from country to country. Essentially there is no uniformity across the euro area in the basket of products and services that are used to measure the rate of inflation. This happens because of differing lifestyles, consumer attitudes and structure of household expenditure.

For example, the weighting given to food as a percentage of the total basket is higher in Malta than the euro average. It is also higher in the case of household equipment, communications, education, and hotels and restaurants.

In Malta it is lower in the case of housing and fuel, health, clothing, alcohol and tobacco and transport. Looking at the individual indices, Malta experienced a higher inflation rate in the case of food, transport, education and hotels and restaurants, than that experienced within the euro area on an average basis.

As already noted comparing our data on inflation with that of other countries in the eurozone, provides some positive indications and some negative indications.

However, what is crucial for us as a country is to understand why we have an increase in prices for certain product or service areas higher than the euro area average. Is it because the internal market is not functioning as effectively as it should? Is it because of public policy measures? Are the apparently higher rates the result of a timing difference? These and other aspects need to be looked at carefully in the coming months.