Editorial | ECB must act to address rising inflation

Economists will tell you that controlled inflation is not a bad thing because it signals growth and also contributes to job growth.

The European Central Bank’s monetary policy aims to maintain price stability by targeting an inflation rate of 2% over the medium period. In the eyes of the ECB, inflation that is too low is just as bad as inflation that is too high.

But there is growing concern across the EU over rising prices, particularly in the energy sector.

The factors driving inflation have much to do with increased demand after COVID lockdowns were lifted, which was not met because of supply chain disruptions that contributed to shortages and hikes in transportation costs.

There is growing pressure on the ECB to intervene by increasing interest rates but the problem across the Eurozone remains the disparity in inflation between different countries.

Malta is not immune to rising inflation. The country does have an advantage in that energy and fuel prices remain unchanged. Energy prices have been the principle driving force of inflation across the continent.

Government has also pledged to cushion any increases in energy prices throughout 2022 by setting aside €195 million.

However, statistics show that inflation in other aspects of daily life such as food, restaurants and various services, is on the increase. This is biting into family incomes and undoubtedly creates pressure on industry to increase wages.

Transportation costs and higher prices for raw materials as a result of global shortages may be more exacerbated in the Maltese context.

Malta being a small market makes it easy for suppliers to overlook the country when dealing with a global shortage or else make it more expensive to deliver goods here. Domestic suppliers and importers are having to deal with stock shortages.

There is very little the government can do to address this global phenomenon. The financial cushion for energy is a positive intervention but one can hardly expect a similar financial outlay on other products and services.

Dealing with this situation is not straightforward.

Government can mitigate some of the costs by supporting business efforts to secure more warehouse space so that they can place larger orders to spread costs and avoid stock shortages.

Any government-induced port costs must be waived temporarily for the next nine months, while a direct cash injection to families in the form of a one-off bonus to mitigate inflationary pressure on incomes will ease demand for higher wages.

Ultimately, the onus of dealing with inflation through monetary policy falls squarely on the ECB and it is high time the powers that be take stock of the situation.

The ECB’s own target is to make sure that the rate at which the overall prices for goods and services change over time remains ‘low, stable and predictable’.

European households and businesses are not seeing stability and predictability in the current scenario, let alone low inflation.

Erosion of incomes already impacted by the pandemic will only contribute to less social cohesion and instability.