A new anti-inflation mechanism targeting poorer households is being developed by a team of government economic advisers.

Analysts at the finance ministry’s economic policy department have been running simulations on what would happen if they tweaked the way cost of living adjustments are calculated for vulnerable households.

This would be over and above the existing COLA allowances already issued to households and would come from public funds, not employers. 

The COLA mechanism raises wages based on the rate of inflation over the previous year. The government is proposing changing the way this is done for the poor and pensioners, giving them a larger pay-out when prices spike.

To do this, the government experts are looking at changing the way the cost of essential purchases are weighted for those at risk of poverty or on state pensions.

Some simulations run in recent weeks saw the adjustments go up by as much as 66 per cent, climbing from the €1.75 given out for 2022 to €2.91 for households defined as poor.

The simulations, which were described as preliminary and not binding, will be presented to the social partners by Finance Minister Clyde Caruana in a technical briefing later this week.

The Malta Council for Economic and Social Development will be asked to propose its own amendments to the COLA mechanism.

Price of inflation

Shoppers have been feeling the pinch in recent months as the country’s rate of inflation climbs.

According to the National Statistics Office (NSO), the rising food prices pushed the overall annual rate of inflation up to 2.59 per cent. This is above the ideal guidelines set by the European Central Bank.

Official statistics released this month show food prices have gone up at their fastest rate in at least four years, driving inflation across the board. 

COVID-19, Brexit and drastically increased transport and freighting costs have been blamed by importers as being behind a perfect storm of price increases in recent months.

What is COLA and why might it change?

The COLA mechanism dates back to 1992 when the government and the social partners had reached a deal on wages known as the National Agreement on Industrial Relations.

A reflection of the country’s reliance on imported food and a supply of domestically produced food

The deal included a wage adjustment handed out by the government and based on percentage increases in a measure of consumer prices known as the Retail Price Index (RPI).

The adjustment works by comparing the 12-month average price index between one September and that same month of the previous year.

Caruana’s advisers say they have identified a “policy gap” in the current COLA system, particularly impacting lower income households. 

The COLA adjustment is based on a basket of goods purchased by a typical household. However, the advisers argue that this does not consider the impact inflation is having on households on the lower rungs of the economic ladder. 

Food forms the largest part of the index, accounting for around a fifth of the final total basket.

This is not only because putting food on the table is a top concern for families but is also a reflection of the country’s reliance on imported food and a supply of domestically produced food, which the experts say is highly price volatile.

Adding weight to the basket

The ministry experts have come up with three different models of how they could potentially rework the COLA mechanism for the vulnerable. 

The first two models come up with new formulas for reworking the COLA specifically for pensioners and those defined as poor. The definition of poor household is based on the poverty line in relation to the average wage.

Both models were drawn up following talks with the NSO. 

A third model looks at proposals put forward by Caritas last year.

The Church organisation had proposed reworking the entire basket of goods, adding new categories and changing the way existing parts of the basket of goods are calculated.

The experts do not give an outright recommendation on which model they believe should be used.

Limitations

The experts’ findings come with a disclaimer – the simulations have some limitations. These include a margin of error, although they say that the finds “should be quite indicative of the real situation”.

The simulations also only cover around half of the total expenditure by the vulnerable households and recent changes in spending patterns are not factored in. 

Finally, data on some of the new baskets of goods used for the simulations was not deemed to be comprehensive.

Intense data collection

In addition to reworking the formulas used to calculate wage increases for vulnerable households, the team of experts say that the new policy will require “an intense data collection process”.

Updating the weighting for the top 30 RPI commodities by weight would require the collection of prices of over 6,000 items from more than 550 different outlets every month.

Decade of COLA

This table shows the COLA payments over the past 10 years. 

2012	€4.08
2013	€3.49
2014	€0.58
2015	€1.75
2016	€1.75
2017	€1.75
2018	€2.33
2019	€3.49
2020	€1.75
2021	€1.75