Last week the National Statistics Office published the latest data on prices and inflation. They show an inflation rate that is edging upwards, even if the harmonised index of consumer prices showed a decrease in June 2006 compared to the previous month.
The annualised rate of inflation based on the retail price index reached 3.11 per cent in June 2006 and 3.30 per cent in July 2006. The annualised harmonised index of consumer prices showed an increase of 3.26 per cent in June 2006 over June 2005. However, the retail price index showed a decrease in prices in July 2006 over June 2006.
Thus in the short term inflationary pressures are abating, but over a one-year period are showing an increase over the previous year. The impact of inflation on the competitiveness of companies operating in Malta is certainly not to be minimised, especially given the downward movement of prices for several of the goods and services produced in Malta, especially for the export market.
Prices for tourism services is just one such example, where service providers are facing pressure from their customers to reduce prices, while having to manage a supply side situation that is pushing up prices.
The pre-budget document published by the government was quite clear on this issue. This document expresses concern that higher inflation could spur higher unit labour costs, which unless sustained by increasing higher productivity levels, may have negative implication on the competitiveness of firms operating in this country.
The extent to which inflation can be better controlled is an issue that puzzles all economic policy makers around the world. Interest rates are used very often to dampen consumer demand, to create a surplus in the market that would hopefully lead to a fall in process.
Malta is no exception in this regard. However, one needs to appreciate that the inflationary pressures that we are currently experiencing locally are, in the main, attributable to two factors - fuel prices imposed by the international market and the prices of some imported products determined by foreign suppliers. These two factors render us quite helpless when seeking to control inflation. A closer look at the NSO data proves this.
The HICP indicator shows a year on year increase in June 2006 of 3.26 per cent. This is lower year on year increase than that registered in April and May of this year. Thus the short-term trends are definitely more favourable than the long-term trends. The HICP differs from the retail price index in a number of ways, including the fact that the population base of the latter covers only Maltese households while the population base of the former covers also foreign visitors and institutions and the fact that the product categories used in these indices are similar but not identical.
Although over a one-year period all product categories within the HICP registered an increase in prices, three stick out very evidently. The transport category registered a price increase of 7.6 per cent while the health category registered a 4.2 per cent increase in prices, compared to the overall average of 3.26 per cent. The housing, water, electricity, gas and other fuels category registered a price increase of 12.6 per cent. It is estimated that these three categories have accounted for 2.11 points of the 3.26 point increase in the index.
Most of these items are either strictly related to the international price of oil or their prices are determined by foreign suppliers. The pre-budget document estimates that higher prices for fuel and lubricants for personal transport equipment, electricity, water supply and gas contributed around 38 per cent of HICP inflation.
If we now assess the movement in the retail price index, one notes a downward trend in the index for the months of May, June and July, confirming the positive short term trend emerging from the HICP. The year on year increase in the index up to July 2006 is of 3.95 per cent. Although all product categories showed an increase in their sub-index, one notes that the prices of water, electricity, gas and fuels increased by 33.18 per cent, the prices of transport and communications products and services increased by 4.85 per cent, and the prices for housing increased by 4.51 per cent. It is estimated that these three product categories accounted for 2.21 points of 3.95 point increase in the retail price index.
Admittedly, whatever the cause of inflation, it is still Malta's problem and not someone else's. However, given the impact of negative external circumstances on our economy, the social partners should appreciate that their requests and their decisions do not exacerbate the problem rather than make it more manageable. The country cannot afford an inflation rate of 3.3 per cent. Not only does it make entry into the euro zone more difficult, but it would also make it harder for firms operating here to compete on the international market. Within this scenario, the social partners must learn to manage to expectations of the members they represent, be they producers and employers, be they employees.