The economic experts’ views on the prospects of fast-rising inflation have changed considerably over the last few months. While, up to some time ago, the prevailing view was that it was a temporary phenomenon, many now acknowledge that we have to live with high inflation for much longer than initially predicted.
Prices of most things are rising and consumers do not need to be convinced of this. An online survey conducted by Times of Malta confirms that the flames of inflation are burning a hole in most consumers’ pockets. The surging cost of food, specifically, hits low-income families especially hard.
The causes behind the current steep rise in prices are now well documented. The pandemic dynamics are driving inflation: sick workers in manufacturing factories, supply chain disruptions, transportation bottlenecks and labour shortages have meant rising costs for wholesalers that are generally then passed on to consumers.
One needs to add the toxic effect of increasing geopolitical tensions between Russia and Ukraine, rising fuel prices and bad harvests in some parts of the world. Moreover, interest rates are likely to increase soon as central banks try to tame the threats of galloping inflation.
The Minister of Finance, Clyde Caruana, has declared the government “must be ready to take measures in the face of rising prices brought about by imported inflation”. The government can do very little to control the rising prices of imported goods. However, it can carefully plan to douse the inflationary fires that severely affect the poorest citizens because, in a modern economy, no one should struggle to eat because of spiking food prices.
Much to its credit, the finance ministry is doing precisely that. As we reported, it is working on proposals to amend the cost-of-living adjustment (COLA) mechanism as it applies to pensioners and people below the poverty line by recalculating the effect of essential purchases. These are the sectors of society that suffer most from food insecurity. While they represent a minority of the community, they need the most help.
Pensioners who have limited income and no assets they can rely on, children living in distressed social environments, the working poor and those who have no significant revenue because of physical or mental disabilities often do not have a loud voice when the social partners discuss ways of managing the effects of inflation on employers and workers.
Most businesses are unable to absorb the cost of rising prices of imported goods because of the economic stress they suffered during the past two years. Still, supermarkets, for instance, were the least affected by the disruption.
They saw their turnover and profits increase as people decided to buy more food when catering establishments were closed. Those businesses affected positively by the pandemic need to understand their social responsibility towards the community by absorbing at least a part of the costs of imported inflation.
With elections being so near, the finance minister is unlikely to resort to redistribution tactics by increasing taxes to finance the widening fiscal deficit. We may have to wait until the next administration has had time to take the country in their confidence and define how the impact of the pandemic on public finances will be managed.
The government has done well to use its fiscal tools to protect jobs in the past two years. It now has the task of selectively protecting those who are disproportionately affected by rising inflation, which is unlikely to disappear anytime soon.
We encourage the social partners to add a constructive voice to this effort.