The inflation rate of consumer prices registered in October was 4.2 per cent, significantly higher than that of the eurozone but lower than the high rates experienced some months ago. So, is it time to pay less attention to the factors driving high inflation?
Central Bank governor and former finance minister Edward Scicluna diplomatically argued that fiscal measures are currently minimising the effects of monetary policy strategies adopted in the eurozone.
Despite strong recommendations by the IMF and the European Commission, the government is not committing itself to the judicious winding down of the energy subsidy schemes.
Scicluna argues that the energy subsidy scheme must be “targeted and temporary” as, otherwise, it could fuel domestic demand, making it harder to slow down inflation. He added that a key priority must be finding ways of building fiscal buffers to allow Malta’s economy to weather any unexpected shocks and that it will be necessary for the country to avoid “misalignment” between fiscal and monetary policies.
The traditional tool often used to tame high inflation is raising interest rates. Experts generally agree that the dynamics driving high inflation in the last few years were supply-related, with bottlenecks in the supply chain. These bottlenecks have mostly been resolved. But inflation rates, while declining, remain at a dangerously high level, especially in Malta.
European Central Bank president Christine Lagarde recently said that the future decisions of the bank will ensure that eurozone interest rates will be fixed at levels that will restrict demand for as long as necessary.
However, the fiscal measures adopted by the government will continue to fuel demand, making high inflation more endemic. The energy subsidies are cushioning consumers from the realities of the actual cost of energy.
This lulls people into a false sense of financial security and encourages them to spend more, fuelling inflation.
The tourism industry, for instance, is experiencing a boom year as Maltese taxpayers are subsidising the energy consumed by accommodation, catering and transport providers.
The increase in interest rates is not having a significant effect on taming demand.
The government is subsidising lending by banks through different business support schemes. In the short term, this cushions the impact of inflation but in the longer term could lead to economic inefficiency.
‘Greed-flation’ is yet another reason behind the increase in consumer prices. While this is a factor that affects consumers in many countries, the small size of the Maltese market makes it easier for business cabals to punish local consumers more heavily.
More efforts must be made by regulators to ensure that businesses do not clamour for taxpayers’ support in a crisis, only to exploit consumers when they can.
Finance Minister Clyde Caruana has indicated that the government wants to keep the energy subsidies in place until various energy projects that will drive down the unit energy cost are up and running.
This is just political magic thinking that goes against sound fiscal management principles.
The country is quickly eroding its fiscal buffers, weakening our defences for any unforeseen downturns in the future.
Ignoring the realities driving inflation is a tactic for which ordinary people could end up paying a high price in future.