In an article I wrote last March, I had asked if inflation was going to become an issue during 2021. In one of my contributions at the end of last year, I claimed that 2021 was also the year when inflation reared its head again. In my article of two weeks ago, I wrote that although many analysts thought that the inflationary pressures would be transitory and would fizzle out over a period of a few months, there is now agreement that inflation will persist in the medium term.
The data that is emerging is, in fact, showing that after more than 10 years of low inflation, the rate of inflation is back to a very high level, the highest it has been for decades.
The US reported an inflation rate of seven per cent, way above the notional target of two per cent that independent central banks around the world had. What has contributed to this high rate in 2021 are the prices of energy, cars, housing and food. These four items represent around 60 per cent of consumer purchases in the US, but accounted for 80 per cent of the inflation rate.
Consumer prices in the eurozone, which exclude energy, food, alcohol and tobacco, increased 2.6 per cent in 2021. If one just excludes energy, the rate of inflation would have been 2.8 per cent. The rate of inflation was at five per cent. This is admittedly well below the US level but it is still much higher than it has been in the last 30 years. In January 2021, the inflation rate was 0.9 per cent.
Analysts have established that high energy prices, stronger demand resulting from the reopening of the economy and increasing producer prices as a result of disruptions in the supply chain have led to a strong surge in inflationary pressures. If the increase in energy prices slows down, then inflation would also slow down.
Let us look at the situation in Malta. The latest data from NSO is for November 2021. The annual rate of inflation as measured by the retail price index was 2.38 per cent. Food was by far the major contributor to this increase in prices. The annual rate of inflation as measured in January 2021 was 0.33 per cent. Therefore, although the rate of inflation in Malta is below the average for the eurozone, it is still very significantly higher than it was a year ago.
The policy response to a high inflation rate should be an increase in interest rates. The US Federal Reserve has already announced that it would raise interest rates three times in 2022. The European Central Bank is more reticent in this respect and is not saying that it will raise interest rates, mainly because its long-term view of inflation is that it will be below the two per cent target in 2023 and 2024.
Since Malta is part of the eurozone, interest rates will follow the trend set by the ECB, unless commercial banks decide to increase their bank rate.
Since there is a lack of synchronisation in the medium-term outlook on inflation between the US and the eurozone, and as a consequence of their interest rates, there could also be an impact on the exchange rate between the euro and the US dollar. This, in turn, could have a consequence on international trade.
We, therefore, need to see how the inflation story will evolve in the coming months. Will it turn out to be the spectre some are making it out to be? Or will it turn out to be much ado about nothing? Either way, Malta needs to be prepared.
We need to see how the inflation story will evolve in the coming months. Will it turn out to be the spectre some are making it out to be? Or will it turn out to be much ado about nothing?
In addition, we need to be wary of creating shortages in our local factor and product markets so as not to fuel domestic inflation ourselves.