The publication on July 18 of the Harmonised Index of Consumer Prices (HICP) – July 2022 by the National Statistics Office [NSO] intensified the concern about the global inflation crisis that is threatening Malta and elsewhere.
The main conclusion of the report is that the annual rate of inflation shot up to 6.8% in July, with the largest upward impact coming from food and non-alcoholic beverages.
Compared with the euro area counterpart latest available data, that is June 2022, the annual rate of change by Malta’s HICP All-items index was 2.5% lower than the 8.6% registered in the euro area. However, when energy and unprocessed food are excluded, the Maltese index stands at 1.6% higher than that for the euro area. This reflects the government’s successful measures to maintain stable energy prices and at the same time Malta’s vulnerability to imported food prices.
The main challenges facing us in the short term are therefore how to manage rising food prices and how to ensure the sustainability of keeping energy costs stable. And this has to be done without denting the growth of our economy and without incurring any significant budgetary deficit.
Crucial policy decisions for the upcoming 2023 Budget have to be taken. Understandably, considering the current geopolitical and economic uncertainty, such decisions will be challenging, to say the least, and are bound to stir up much debate and divergence of views.
The causes and the outlook of inflation in the euro area are constantly being discussed and evaluated by Commission and ECB experts. The euro area economy is clearly slowing down. The downside risks identified last June by the Commission in its summer 2022 economic forecast are now materialising. Indicators of consumer and business confidence have declined further. The Purchasing Managers’ Indexes (PMI), whose data provides closely watched market moving indicators, dropped significantly, both for manufacturing and for services.
There are, however, still some pockets of resilience mitigating the general downturn of economic growth. Among these is the post-pandemic rebound in services, particularly tourism. This highlights the importance of managing our tourism sector in a sustainable and organised manner, ensuring a better and more diversified air connectivity to our islands. These will continue to prop up the economy only to a limited extent and overall economic growth in the euro area is expected to decrease to 1.4% in 2023.
The good news comes from the labour market, which remains very strong. A high demand for labour and historically low unemployment rates are keeping the labour market steady. This implies that even during an economic downturn employers would be reluctant to lay off workers on a large scale. Moreover, a strong labour market will support household incomes. This, together with carefully balanced fiscal policies, may compensate for the decline in real household income coming from inflation.
Nonetheless, the ECB warns that there are strong indications that growth is going to slow and it does not exclude a technical recession, especially if energy supplies from Russia are disrupted further and if there are additional supply shocks caused by drought and low water levels in Europe’s major rivers.
Moreover, the depreciation of the euro exchange rate is making the inflation problem worse. Half of the goods imported in the EU are invoiced in US dollars and more euros are needed to pay for them, leading to higher consumer prices.
The main challenges are how to manage rising food prices and how to ensure the sustainability of keeping energy costs stable- Edward Zammit Lewis
Headline inflation in the euro area increased again in July and now stands at 8.9%. What is worrying is that inflationary pressures are becoming more broad-based. Energy and food prices continue to be the major factors feeding inflation but increasing inflation rates have been recorded also for services and non-energy industrial goods.
ECB experts do not exclude that inflation will increase further. The bank’s projections are surrounded by high uncertainty, making it difficult to predict when inflation is going to peak. Even with the ECB’s ongoing monetary normalisation policy it will take time before the target of 2% is reached. Indeed, there is even the risk of de-anchoring from the 2% standard.
The ECB is caught in an acute dilemma. On the one hand, inflation is soaring and this calls for an increase in interest rates. On the other hand, the eurozone’s economy is slowing down and this calls for low interest rates. On July 21, the ECB took what it judged to be a necessary first step to make sure that inflation returns to its 2% target in the medium term.
There is significant country heterogeneity within the euro area both with regard to inflation and economic growth. This depends on the extent of the country’s exposure to imported inflation and the success of the measures taken to control it. According to Eurostat’s July estimates, Malta has the lowest rate of inflation and its economy is forecast to grow nearly twice the eurozone’s average. This confirms the soundness of the measures the government has taken so far.
As the consultation process for the upcoming Budget gets under way, representatives of economic operators, workers’ unions and NGOs, mainly those concerned about social and environmental issues, argue their points of view to defend their specific interests.
It is healthy to have such an open and vibrant debate and its input on the government’s policies is considerable. Together we can achieve the much required ‘balancing act’ ‒ we can deal with uncertainties, achieve price stability and overcome the current inflation crisis without straining the level of well-being we have achieved.
Edward Zammit Lewis is a Labour MP and former justice minister.