The talk of the town is inflation. The data recently published by the National Statistics Office shows that the 12-month moving average inflation rate was at 4.3% in June of this year, while the annual rate of inflation stood at 2.8 per cent. Prices have always been a key issue in our economy because of their direct impact on real income. As such successive governments have made the containment of inflation one of their top priorities. From an economic perspective, the other top priority in our country is employment.
At times it has proved to be impossible to achieve both low unemployment and low inflation, and this has given rise to opposing views as to which issue is the more important. Is it inflation or is it unemployment? Looking at it from the point of view of an individual, if one feels secure in his or her job, the fear of unemployment does not feature in one's life and so the inflation takes priority. If one does not form part of the labour market (such as a pensioner), inflation is also the number one priority for that person. However if one is in a job and the economy is passing through a period where jobs are being shed, then the fear of unemployment takes over.
Therefore at the individual level economic priorities keep shifting depending on one's personal situation. This is probably best explained by the fact that in Malta the issue of inflation is very much tied to the water and electricity charges, and therefore to just one component on of one's expenditure. In this context one needs to keep in mind that a person's viewpoint about his or her own financial situation is short term in nature. On the other hand when we look at economic priorities for a country, we need to view matters in the long term, and therefore one starts to understand even more the conflict in priorities.
The inflation issue does require such long-term thinking. The 12-month moving average inflation rate started rising just after summer 2007. At that point the international prices of commodities, mainly foodstuffs, were rising at a significant rate. These reflected themselves on the local market. This movement explains the gradual but steady rise in the inflation rate.
During 2008, the international price of oil rose to unprecedented levels. Our water and electricity charges were heavily subsidised through the taxes that we paid during the first nine months of the year.
Then these charges were raised to reflect the true cost. This caused the inflation rate to rise even higher. In the meantime, the prices of both the international commodities and of oil started to fall. Thus once the twelve month cycle, on which the moving inflation rate is calculated, runs out, one would expect the inflation rate to go down. In fact, if one looks at the annual rate of inflation (which is computed by comparing one moth with the same month the previous year), this is already lower than it has been for the last 20 months.
Moreover, the more the local market is freed of certain rigidities and certain monopolistic structures, during times of subdued demand like we are currently experiencing, the likelier it is that prices will fall. So I believe that what we are seeing as an ugly spectre today, is likely to disappear in the coming months. Inflation is today's issue and could have been yesterday's issue, but is not expected to be tomorrow's issue.
On the other hand, jobs and unemployment are current issues and could become the key issue of tomorrow. So far we appear to have handled the jobs situation very well, which proves the correctness of government's strategy.
The latest available data shows that the number of persons in a job increased by 3,500 persons, while the number of persons who are unemployed increased by 1,000. Another important indicator is the activity rate, that is the labour force as a percentage of the population of working age. This has risen in the first quarter of this year compared to the first quarter of last year. The activity rate does not rise in times of crisis in jobs.
To this one has to add that government did not need to resort to excessive increased spending to shore up the economy as has happened elsewhere. The fiscal deficit as a percentage of the GDP is one of the lowest in the Euro zone.
However, this is another issue that needs to be tackled separately. The conclusion that one arrives at on the basis of the data available, is that in terms of economic priorities, inflation remains an important issue, but jobs is a far more important priority than inflation. The country needs to focus most of its energy on how to safeguard jobs and to generate new ones.