Editorial: Lower-income, higher-inflation challenge

The income and wealth gap is growing wider and high inflation makes this challenge even more daunting. The latest National Statistics Office (NSO) data for inflation in August confirm that inflation levels are affecting low-income families and high-income families differently.

The annual rate of inflation in August was 2.7%, up from 2.4% in July, primarily due to a 4.4% increase in food prices. Food prices account for 21.49% of the Retail Price Index, with 15.6% allocated to food and 5.89% to restaurants and takeaways.

The Nationalist Party noted that the latest NSO inflation data is confirmation that the prices of the most essential items for Maltese families remain among the fastest rising.

The Labour Party argues that the opposition is “continuing to fail in economic analysis” because food prices contributed to only 0.95% of the August increase in inflation.

It is time to look at the broader picture, rather than simply examining inflation figures in isolation, without trying to understand how price increases are affecting different sections of our society. 

In a nutshell, all households are facing higher prices but the burden is particularly significant for those with more limited resources. It is time for policymakers to understand how inflation experiences vary from household to household, how these variations correlate with income and demographic information and how these divergent inflation experiences evolve.

Consumption baskets vary across income groups, with low-income households spending proportionately more on essentials. Low-income families allocate a higher proportion of their total consumption expenditures to food and a lower proportion to transportation, recreation, restaurants and household goods, compared to higher-income households. While energy subsidies are easing the burden on all households, higher-income families are benefiting much more from this taxpayer-funded support. Conversely, the different spending patterns of lower-income families mean they must spend a larger portion of their income on purchasing food.

Price control tactics are rarely successful, especially since the enforcement of regulations is often lax. A more equitable distribution of support for lower-income families to cope with higher inflation is needed to ensure that the income and wealth gap does not continue to widen.

Low-income households have less room to better cope with increases in their cost of living through savings. They tend to consume a larger share of their income, save less and face liquidity constraints more often than high-income households. This means that low-income families have a lower capacity to absorb sharp, inflation-driven increases in living costs.

One inflation-curbing tactic to support financially distressed families is for the government to follow the recommendations of the IMF and the Malta Chamber to recalibrate energy subsidies, ensuring that taxpayer money focuses more on helping those who need it most. This would also demonstrate our commitment to save energy, which is more than just a public relations stunt.

Before the pandemic, attempts to measure inflation for different subgroups within the community were rare. For more than a decade, core inflation in the eurozone had fluctuated in a narrow range around 2%. An increase in interest rates, geopolitical uncertainty and supply chain disruptions have significantly altered this scenario, with food prices becoming particularly volatile.

Data from the income-specific consumption baskets reported in the Eurostat Household Budget Survey enable the calculation of effective inflation rates for different segments of the population, which could help calibrate inflation-curb measures more equitably.

Policymakers must focus more on analysing the varying impact of rising inflation, especially on food prices, for different types of households, including low-income families with children and retired individuals.