More than a decade of exceptionally low inflation has desensitised businesses and households to the risks of the opposite trend. COVID and the Ukraine war, among other factors, have brought the “monster” of high inflation – as Central Bank of Malta governor Edward Scicluna referred to it last week – back on the agenda of policymakers, businesses and ordinary people.
Scicluna told journalists that “inflation is likely to remain too high for too long”. Indeed, it would be delusional to imagine a return of the benign inflationary scenario that persisted for years after the great financial crisis of 2008.
The increase in the prices of consumer products over the past months points to a sky-high cost-of-living (COLA) adjustment. Even retaining the subsidies on energy prices, the COLA compensation that would be awarded to all workers next year is already projected to have reached €13 per week. That would be disastrous for thousands of employers.
The risk of redundancies is increasing, and the worst hit will be low-wage earners. Central banks have tough challenges ahead. They realise that stubbornly high inflation threatens the livelihood of many households. On the other hand, raising interest rates to control inflation would adversely affect economic growth prospects.
Membership in the eurozone means that interest rates are likely to rise. The risk is that companies have become addicted to the low cost of money.
A combination of benign monetary policy and generous taxpayer-financed business-support schemes have enabled some floundering firms to survive when they would typically have faced dissolution.
Viable businesses should continue to be supported but the government must start to be more careful about throwing good money to support unviable companies. Scicluna is correct in warning that tough decisions may need to be taken.
In the last two years, protecting businesses and households from the worst effects of spiralling energy and food costs was the right policy to adopt.
However, energy subsidy schemes may have encouraged waste by failing to distinguish between essential and non-essential consumption.
The present subsidy scheme is regressive in that it benefits the affluent as much as the vulnerable. The IMF has urged the government to revise the way these schemes work before the end of the year. The advice must be heeded.
"The uncertainties created by the pandemic and the war have disrupted supply chain dynamics. The worker shortages in many sectors of the EU economy will continue to raise the cost of labour"
The government must also do its utmost to ensure that the business community does not resort to price gouging – charging customers an unfair premium under the guise of inflationary pressure. While inflation in the eurozone has been easing, the trend in Malta appears to be heading in the other direction. It is clear by now that some major importers are abusing the situation and inflating prices on the false pretext that the costs are ‘imported’. This short-sighted approach will ultimately come back to haunt them.
In an increasingly fragile economy, it is all the more important that the government cuts all waste in the public sector and boosts its efforts to collect all taxes as and when due.
The uncertainties created by the pandemic and the war have disrupted supply chain dynamics. The worker shortages in many sectors of the EU economy will continue to raise the cost of labour.
In this scenario, it is reasonable to expect high inflation to persist for a few more years. This could lead to industrial unrest as workers see their take-home pay increasingly eroded by high prices.
The government must show more determination to tackle the effects of high inflation. And businesses that are capitalising from the uncertain situation need to be called out. This problem is seriously threatening livelihoods.