The recently released National Statistics Office (NSO) report on the Retail Price Index (RPI) reveals worrying developments. Since February, the index has begun an upward trend and is increasing rapidly.
Prices for the most essential items, including clothing and footwear, household equipment, home maintenance and food, are creeping up well above three per cent. These levels are surely a cause for concern. Unlike children who can hide under the blankets to escape the wrath of an imaginary monster, inflation cannot be avoided. It drives lower-income earners deeper down the poverty trap.
Uncontrolled inflation terrifies economists. When economies are overheated, consumers’ purchasing power is eroded dramatically. Uncontrolled inflation has a tendency to set off vicious spirals.
After a long period of near stagnation in prices and the receding of the pandemic, the rise in inflation initially suggested a return of economic growth. This provided some ground for cautious optimism. However, with inflation rising exponentially, it has become a global problem.
A widely-held principle is that price rises of around two per cent per annum are considered relatively healthy. Central banks tend to support this level of upward price movements in an economy. This rate is generally followed by increased demand, higher output and gradual wage adjustments. However, when price rises surpass this threshold, the economy goes into a turmoil and spending power gets quickly eroded.
The negative effects of inflation mostly impact poorer families, who are affected in a disproportionately greater way. Higher-income earners often offset price increases with increased income. Price rises are often higher for basic needs rather than for luxury items, a phenomenon that economists call ‘inflation inequality’.
In a recent seminar, run jointly by the Central Bank of Malta (CBM) and the Malta Chamber of Commerce, one of the CBM representatives made a well-documented presentation on the impact of inflation on low-income households. It was argued that the spending patterns of people with different income levels vary considerably as far as the retail price index is concerned. The speaker pointed the need to develop a price index based on the basket of goods purchased by low-income households. It was also suggested that this index should guide decision-makers on how to extend social benefits beyond the cost of living adjustment (COLA) to maintain the purchasing power of low-income individuals.
Additional funding to promote the social economy and establishing a living wage should provide more effective solutions. These are effective mechanisms that ensure that work pays off. The social economy provides ways for people, who would otherwise have a hard time finding permanent employment, to become productive. The living wage provides a structure that goes beyond the COLA. It provides a better wage adjustment system that targets particularly low-income earners.
Inflation drives lower-income earners deeper down the poverty trap- Claudio Farrugia
One hopes that the finance minister’s announcement of a top-up to COLA for low-income earners is not a mere pre-election sound bite. However, this is not enough to lift a number of people out of poverty. Not providing workers an adequate wage to lead a decent life is nothing short of exploitation. With higher inflation rates, the finance situation of low-income families is coming under increasing stress as they face rising costs of basic necessities. Their spending power is being eroded and this has a long-term negative effect on their livelihood.
Pope Francis has often called for “a basic income or salary so that everyone in the world may have access to the most basic necessities of life”. This system, which is supported by a number of highly regarded economists, gives the opportunity for low-income workers to lead a decent living and contribute more towards an economy.
A virtuous cycle of rising inflation, employment prospects and adequate wages is essential to the common good in which a fair distribution of wealth is fostered.
Before I conclude this article, I would like to express my sorrow at the passing of Sandro Spiteri, a leading member of Catholic Voices Malta. He was the person who inspired, trained and encouraged me to begin writing opinion articles. Sandro’s many friends and family will miss his energy, enthusiasm and commitment to justice. We extend our heartfelt condolences to his grieving family.