Editorial | Mitigating the impact of inflation

Eurostat data released on Wednesday shows that annual inflation in the Euro area in December increased to 2.9% from 2.4% in November. Annual inflation for the whole of the EU was 3.4%, up from 3.1% a month earlier.

The rates are much lower than inflation recorded a year earlier but the month-on-month increase suggests that inflation volatility in the EU is still present.

The Eurostat figures also show that Malta bucked the trend with annual inflation in December declining to 3.7% from 3.9% the previous month. The annual inflation rate in Malta, according to the Harmonised Index for Consumer Prices (HICP), has been declining steadily since July.

Nonetheless, inflation in Malta remains almost a percentage point above the Euro area average despite generous government subsidies to keep the price of fuel and energy stable.

With consumers and businesses shielded from the volatility of international energy prices, inflation in Malta has been driven by services and food. The latter has had a disproportionate impact on households across the board but especially on low income families.

And given that the statutory yearly wage increase (COLA – cost of living adjustment) is pegged with the retail price index operated by the National Statistics Office, the higher inflation rate has led to two substantial COLA increases in 2023 and 2024.

Within this context, the broad agreement brokered by the government with major importers and supermarkets to lower the prices of around 20 staple food items is a positive step.

The agreement, which is expected to last some 12 months, will see prices of these products shaved by 15% on the recommended retail price. Individually, the reductions may not be much but a few cents here and there on a shopping basket over a month will help to ease the impact of inflation on families.

However, there are two considerations that have to be made. The first relates to the product list, which according to information this newspaper has obtained appears to be restricted to food items.

It would make sense to extend the list to a number of basic personal care products such as shower gels, menstrual products and deodorants; and clothes washing detergents. These are also necessary items that every household uses.

The second consideration is a macro-economic one. A similar exercise to maintain price stability had been adopted in 2007 when Malta was preparing for the changeover to the euro currency. At the time, the government had reached several agreements with importers to keep prices fixed for almost six months, straddling the changeover date on 1 January 2008. The idea was to allow consumers the chance to assimilate the new prices in euro while preventing importers from taking advantage of the changeover to increase prices.

The agreements were on a voluntary basis and the government had created a fair label the importers could use to show they were part of the scheme. Eventually, the scheme ended in March 2008.

It is important that any such arrangement to keep prices of basic products stable is accompanied by a timeframe to avoid having an unorthodox system in place for more than is necessary.

The government will not want to create a situation of perpetual price fixing, which will only make it harder to remove at a later stage. A 12-month time window should be enough unless something really dramatic happens that would necessitate the scheme’s extension, in which case it should be for a defined period.

Additionally, fixed prices will not only help keep inflation in check but can also contribute to lowering the statutory COLA increase for January 2025, which might be a good thing for business competitiveness.