The National Statistics Office recently published the data regarding the Harmonised Index of Consumer Prices for the month of January. The Harmonised Index of Consumer Prices is calculated according to rules specified in a number of European Union regulations developed by the EU Statistics Office. Thus it allows for a reliable comparison of inflation rates to be made across the European Union member states. The European Union Central Bank has also used this index for the last seven years to measure price stability in the eurozone.
The NSO previously used to, and still does, publish the Retail Price Index. There is an element of convergence between the two but, whereas the Retail Price Index is based on expenditure by private Maltese Households and is reviewed only once every five years or so, the HCIP also takes into account institutional Maltese households and foreign visitors, apart from Maltese households. Moreover the weightings for the HCIP are reviewed every year and any new types of expenditure are introduced into the index also on a yearly basis.
The comparison with the other member states within the European Union does not present a rosy picture at all. For most of 2004 and 2005 the annual rate of change of the HCIP in Malta was higher than that in the rest of the EU. Moreover, prices in Malta seem to be much more volatile. The fact that the rate of price changes in Malta are much higher would imply that households here are facing serious challenges. This does not necessarily mean that prices are higher in Malta, it's just that they are rising faster. This would in turn lead to a higher adjustment being required for the cost of living.
Whether the rate of price changes in Malta is due to higher demand or due to supply considerations cannot be deduced from the NSO data. However, the higher element of price volatility in Malta would seem to suggest that suppliers are able to use the price mechanism to equate supply and demand at times of excessive demand for reduced supply. This is easier to do in Malta because situations of excessive demand or reduced supply are more frequent.
Malta being an island, we cannot just catch a train or go for an hour's journey by car in search for better prices, as is done abroad, at times even across borders. It is done on a limited basis when Maltese go to Sicily and in fact this is reflected in the prices of those goods that can be easily imported from there.
A week ago the Prime Minister did mention that his government was not willing to allow the development of cartels in Malta. The rate of price increases (considering that we import most of what we consume) and the higher price volatility (considering that prices abroad have not been so volatile) does seem to suggest an element of price fixing by suppliers and thus an element of market failure.
Looking at the specific segments that make up the Harmonised Index of Consumer Prices and seeing how they have changed during the 12 months up to the end of January 2006, one notes some interesting developments. Overall the index went up by 2.37 per cent. The only segment that showed a significant decrease in prices was in the clothing and footwear segment, where prices went down by 5.7 per cent. A very minor decrease in the prices for items falling under the heading recreation and culture was also noted. All other segments showed price increases.
The three segments that have been the drivers for this upward push in prices are the housing, water, electricity, gas and other fuels segment, the health segment and the transport segment. The first segment registered an increase in prices of 9.9 per cent, the second segment registered an increase in prices of 4.4 per cent, while the third segment registered an increase in prices of five per cent.
The source of the price increase of water, electricity and gas is known. However the source of the price increase in the health segment and the transport segment is not known.
This is what may have led the Prime Minister to declare that it would clamp down on any form of cartel that inflated prices. He also stated that government is in discussions with constituted bodies to ensure that the country has fair prices in line with the rules of competition. In effect, if there is really a competitive market, without the shackles of any rigidities operating, then we should have experienced a drop in prices. The fact that we have not would imply that there is something that is impeding the market from operating effectively.
It may seem draconian that a government intervenes to ensure fair prices. On the other hand, government intervention is more than welcome if there is market failure. My fear is that this market failure is a reality in certain goods and services and all social partners should welcome strong government action that achieves effective price liberalisation.