Many people have a problem understanding how GDP and incomes have grown so much in developed countries and yet poverty and inequality persist.
Economic inequalities stem from the economy’s systemic barriers that limit socio-economic mobility, such as low-wage jobs, inadequate worker benefits, and insufficient opportunities for career advancement.
Research has also shown that prices may rise more quickly for those who have lower incomes, which is the phenomenon called inflation inequality. People with higher incomes can offset rising prices with rising incomes. Sadly, though, rising prices can entrap lower households in poverty.
Against this background, a study by a senior economist of the Central Bank of Malta is welcome indeed. Jude Darmanin has just authored a policy note where he uses data from the Household Budgetary Survey (HBS) and the Retail Price Index (RPI) to calculate an inflation rate for households in the bottom income quartile, that is, the 20 per cent of the population with the lowest equivalised income.
This is the first time that this aspect has been studied in detail, and its conclusions will surely be of great help to policy makers, not to mention the social partners.
Darmanin rightly points out that in recent years a combination of easing international price pressures, structural changes and increased competition has pushed inflation down, apart from some years when we have had higher prices for essential commodities. But the latter are the ones that make up a larger share of the expenditure basket of low-income households.
The challenge therefore was how to assess the inflation experience of low-income households compared with the average depicted in the RPI. By disaggregating expenditure shares from the HBS, he derived estimates for the inflation rate faced by low-income households, including households of retirees.
Trend inflation averaged 2.3 per cent between 2006 and 2013, before falling to one per cent between 2014 and 2020. Food inflation has been the main contributor to overall inflation. Energy price inflation was another strong driver, though its impact attenuated in recent years, due both to falling oil prices as well as the government reductions in electricity bills introduced in 2014.
Darmanin shows that the official inflation rate and the low-income household inflation rate generally followed the same trajectory, but the latter was higher by one percentage point between 2010 and 2013. The differential narrowed sharply after 2013 and became minimal, though it widened again during 2020.
Most low-income households either earn the minimum wage and/or benefit from a range of social assistance measures. Darmanin therefore analysed whether social benefits have maintained their real value over time, thus preserving the purchasing power of low-income households. Since benefits are typically increased with the Cost-of-Living Adjustment (COLA), which is based on the RPI and not the expenditure basket of low-income households, this is not guaranteed.
The study reached two important conclusions. The first one is that the actual minimum wage as of 2020 stood above the minimum wage indexed only by RPI inflation. The second one is that, even when accounting for the estimated inflation faced by the average low-income household, the minimum wage still maintained its 2010 real value in 2020.
The situation is better for households which relied on the national minimum pension. In fact, because this pension has benefited from non-COLA increments to a larger extent that the minimum wage, its value has significantly exceeded the inflation-indexed pension. The actual increase in the minimum pension was nearly two and a half times that required to keep pace with the RPI and nearly twice that required to keep pace with the increase in the prices of the basket of expenditure of pensioners.
In both cases, it is only after 2013 that the minimum wage and the minimum pension have managed to retain their purchasing power, and this reflects the ad hoc increases granted by the government. With just RPI-indexation, low-income households would have gradually faced reduced purchasing power.
Of course, this is not the full picture. Within the low income households category, there are different types of households, not all of whom will have been affected by inflation in the same way. In fact, Darmanin also shows that married pensioners benefiting from a full-rate pension have done very well, compared to other households within the same category.
As he rightly says, the study does not assert that the value of social benefits is adequate for a decent standard of living. That is another matter, which is an important aspect in its own right, being regularly tackled by the various Caritas reports on a living wage.
Nor does it account for the impact of the extensive benefits in kind and grants, such as free transport, meals on wheels, free childcare, in-work benefits, and supplementary allowances paid through the social welfare net, which surely offset to some extent the effect of inflation.
Frans Camilleri, economist, consultant at Ministry for Social Justice