Inflation is the economic indicator which measures the change in prices of household goods and services over time. Malta’s annual inflation (based on the Retail Price Index - RPI) was 2.59 per cent as at December 2021. This rate is higher than has been recorded in recent years and follows months where the momentum has been picking up.

Among the product basket, food (including restaurant services and takeaways) recorded a 4.94 per cent rise on a year earlier, contributing almost halve of the overall inflation in Malta. When inflation is driven by higher food prices, this tends to create more pressure on those with low income, for whom food may absorb a larger share of spending than the average household in Malta.

The perceived inflation rate could even be higher than what the official statistics show, since the economic literature suggests that households tend to subjectively assign more importance to items which are bought frequently (such as food). Concern about inflation could lead to higher uncertainty and undermine consumer confidence, with adverse knock-on effects on business.

Inflation erodes the purchasing power of consumers unless incomes can keep up the momentum. A decline in real disposable incomes would affect more negatively the businesses whose products are considered by households as non-essential. Indeed, the higher cost of certain products may need to be compensated for by curtailing spending on other items, to remain within budget.

Businesses’ bottom line may also be adversely impacted should a wage-price spiral be triggered. Rising prices may invigorate employees’ claims for higher salaries. Wage increases which are not matched by productivity gains would end up squeezing margins, unless firms are able to pass the higher costs to their customers. Over 70 per cent of respondents to a survey by the Malta Chamber (carried out between December 2021 and January 2022) indicated that they expect the prices for their product or service to increase.

Of these, almost 60 per cent plan to increase their prices in the region of five to 10 per cent in 2022. Such a development would maintain elevated the inflation rate outlook in Malta for the coming months. 

However, ultimately, it is market forces that determine whether businesses would be able to raise their prices to such extent or not. Businesses must weigh their options, acknowledging the risk that higher prices may result in a loss of clients. To moderate future labour costs, businesses may also seize the opportunity to explore automation and capital- deepening projects.

The concern about inflation is high not only in Malta but across the euro area. Indeed, the inflation rate based on the Harmonised Index of Consumer Prices (HICP), which is the internationally comparable measure, shows that the price pressures in the euro area are higher than in Malta.

Inflation erodes the purchasing power of consumers unless incomes can keep up the momentum. Photo: Matthew Mirabelli- Malcolm Bray

In the euro area, the annual HICP inflation rate stood at five per cent as at December 2021, practically double the 2.6 per cent recorded in Malta over the same period. Prima facie, the inflationary pressures in Malta should thus not have impacted the competitiveness of Maltese businesses vis-à-vis their foreign counterparts.

Around half of the annual inflation in the euro area was driven by higher energy prices. On the other hand, Maltese households and businesses have to date been shielded from the direct hit of the energy crisis, since electricity, gas and fuel prices remained stable.

The effect in Malta was only indirect, through the higher costs of iimported products. In fact, the latest Central Bank of Malta business dialogue (published on 28 January, 2022), indicated that 72 per cent of firms contacted reported an increase in input prices. This was mostly due to the legacy of the disruptions to the global supply chains created by the pandemic-induced international closures.

Public statements by the Maltese government have so far indicated that the intention is to protect the economy from the spike in international energy prices. Hence, in the short term, the energy inflation should be less of a concern to households and businesses in Malta. Nonetheless, this strategy could impact public finances negatively and may only be feasible if the spike in international energy prices proves to be temporary.

Investment in energy-saving technology should thus remain of relevance for businesses and households alike, particularly when considering the various incentives that are currently in place in Malta. The attractive financing conditions are also expected to persist, despite the high inflation scenario in the euro area.

The concerns of a possible rise in official interest rates in the near term – with a pass-through to bank lending rates – still appear low. In fact, in the December 2021 Governing Council meeting, the European Central Bank stated that it was willing to accept “a transitory period in which inflation is moderately above target”.

Malcolm Bray is a market intelligence specialist at Bank of Valletta.

The writer and the company have obtained the information contained in this document from sources they believe to be reliable, but they have not independently verified the information contained herein and therefore its accuracy cannot be guaranteed. The writer and the company make no guarantees, representations or warranties and accept no responsibility or liability as to the accuracy or completeness of the information contained in this document.

They have no obligation to update, modify or amend this article or to otherwise notify a reader thereof in the event that any matter stated therein, or any opinion, projection, forecast or estimate set for the herein changes or subsequently becomes inaccurate.

Bank of Valletta p.l.c. is a public limited company regulated by the MFSA and is licensed to carry out the business of banking in terms of the Banking Act (Cap. 371 of the Laws of Malta).