Most experts believe that the European Union’s inflation will remain extraordinarily high for the rest of the year and possibly beyond. This is not good news for households and companies still recovering from the disruption of two years of the financial strain caused by the pandemic.

The Central Bank reported last week that over 60 per cent of Maltese businesses raised their prices in the second quarter, in what it described as an “exceptional” development. Business leaders are right to fear that costs will just keep spiralling higher in the coming months.

According to Eurostat estimates, annual inflation is expected to be 8.9 per cent in July 2022. In the same month, Malta is expected to register an estimated 6.5 per cent.

Malta may have the lowest rate of inflation in the euro area, especially because it has kept energy prices stable. There is a risk that this apparent achievement will be interpreted as the result of fiscal management magic when it may just be that the country is relying heavily on taxpayers’ money to mitigate the immediate effect of rising prices.

The reasons behind the sharp rise in inflation are well known. Central banks, including the ECB, failed to see this phenomenon erupting dramatically up to a few months ago. They are now reacting by raising interest rates despite the risk of stalling what is already considered sluggish economic growth in the EU.

The current bout of high inflation is caused more by supply-side disruption than by excessive demand. So interest rate rises may not be enough to douse the flames of inflation.

The government has done the right thing in protecting families and businesses from the immediate impact of rising fuel, energy and food prices by subsidising imports of these essential materials. Still, subsidies are not a silver bullet. The time has come to get to grips with inflation in a more discriminatory way by adopting the best tactics to protect vulnerable households without putting at risk fiscal rectitude for too long.

While most businesses and households are already feeling the pinch of high inflation, the real pain is being dulled by the government administering pain killers to absorb a large part of the cost increases on some food, fuel and energy products.

The minister of finance has understandably instructed all ministries to start looking for savings on public expenditure. He should now advise businesses and households to start economising on energy use and other costs to prepare themselves for potential longer-term effects of high inflation.

Malta’s economy showed signs of overheating well before the onset of COVID and the Ukraine war. This was partly caused by exceptionally generous monetary and fiscal policies that hid the need for more prudent management of the economy.

The effect of these lax policies is now being felt and penalising mostly those households on low income. Businesses are also beginning to feel the pinch of high inflation as consumers review their expenditure at a time when their disposable income is being eroded. Businesses will be wrong to expect to pass on their increased costs to consumers as many consumers are having no option but to revise their spending habits

In a few weeks’ time, the annual budget for 2023 will be unveiled. One hopes that the minister of finance will recalibrate his fiscal tactics to ensure taxpayers’ money is used more judiciously to support vulnerable households.

We also hope that budgets earmarked for district/partisan interests are shelved in favour of more social, sustainable and greener ones.

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