For two decades, central bankers were less worried about rising inflation than about deflation. The financial crisis forced monetary authorities to reduce interest rates to historically low levels to encourage economic growth. This did not lead to higher inflation in the short term but inflationary pressures have been building up.
The National Statistics Office says that the annual rate of inflation measured by the retail price index was at 2.08 per cent, up from 1.8 per cent in July. Food had the biggest impact on this rise.
Economic observers may consider this inflation rate as acceptable. Some economists even argue that a moderate rise in inflation is good for the economy. But for a layperson, what matters more is the rise in the food bill they have to incur weekly. An informal survey carried out by Times of Malta on the increase in prices of certain food items indicates that their cost has risen by double figures in the last two years.
There are various reasons behind these very real increases that may not be sufficiently captured by the computations of the retail price index. Malta has a very open economy which means that we import most of the things we consume. Moreover, the pandemic amplified the market problems that predated COVID.
Malta’s trade with Britain has always been significant. Brexit has undoubtedly not helped make the supply chain for procuring UK goods any more effective. Importers have faced more bureaucratic hurdles to import goods like medicine but they have also had to pay customs duty as the UK became a third country in the EU trade processes.
Local importers also complain about the labour shortage in the hospitality, haulage, catering and retail sectors. These sectors may have grown too dependent on imported low-cost labour due to the ease of recruiting such workers in the last few years. It is not clear how many low-paid workers have returned to their homeland or other EU countries since the pandemic but many businesses are certainly struggling to fill vacancies. Some had to increase the wages of low-skilled workers to cope. This undoubtedly is one of the factors behind the return of inflationary pressures.
When it comes to the increase in the price of food, other factors include bad harvests, disruptions in the supply chain due to COVID, Brexit, the shortage of HGV drivers and the increasing restrictions in the EU and the UK on hiring immigrants in the agriculture and the food industry.
None of these issues can be resolved overnight. What is more worrying is that, now, the rise in energy prices, especially natural gas, is bound to keep raising the inflationary pressures.
Most central bankers are worried that the labour market is tightening worldwide. François Villeroy de Galhau, governor of the Banque de France, insists that European countries must reform their labour markets to ease the shortage of labour that threatens price stability. He argues: “There are no reforms more urgent and necessary than those which increase the available workforce.”
Rising inflation and worker shortage are related issues but the solutions to mitigate their effects are not identical. For 50 years, capital and the maximisation of profits have been the driving forces of investment strategy. Labour has for too long been treated as a commodity. This needs to change.
Rather than open wide the doors to migrants from low-cost countries to come in, as some businesses would like to see happen, the government should revamp its labour market policies by reducing taxation on work, incentivising workers in the shadow economy to join the official economy, gradually raising the minimum wage,and investing in the training of unskilled workers.
It is time to give labour more bargaining power.