The latest inflation figures announced by the National Statistics Office (NSO) on Friday showed that despite the reduction in electricity bills, inflation still went up by 0.13 per cent over the previous month. CHARLOT ZAHRA asked three financial experts – veteran economist Karm Farrugia, John A. Consigilio, and Labour candidate for the EP elections Edward Scicluna – on their views about what was leading to high inflation rates in Malta when compared to the rest of the euro area and the EU. Is stagflation a possibility if the contraction in the GDP and the high inflation rate persist over time?
Karm Farrugia: “There is evidence of something dysfunctional in our economy”
What is your reaction to the latest inflation figures announced by the National Statistics Office (NSO) on Friday, which showed that despite the reduction in electricity bills, inflation still went up by 0.13 per cent over the previous month? Utterly shocked. I had been expecting a slightly negative rate of the price index movement over the previous month’s, and undoubtedly not more than 2 per cent on a yearly basis.
What are, in your view, the main factors that are leading to a rising inflation consistently around the 4 per cent mark in Malta despite the fact that inflation in most of the Euro zone countries is contracting? In your view, what concrete actions should the Government take to curb inflation in Malta?
There is evidence of something dysfunctional in our economy. I can’t put my fingers on it, though I would like to.
My own crude economic model, when breaking down the components of the price index, could only point to insufficient competition among the economy’s operators – especially importers – but it hasn’t placated me.
Otherwise our inflation trend would reflect that prevailing in the whole of the EU, and certainly not four times its average, or more.
An objective thorough investigation needs to be undertaken to establish how certain “rogue” economic players manage to increase prices so heavily in a recessionary scenario.
Do you agree with those who say that setting up of a price watch agency with name and shame possibilities on the same lines of the NECC would be effective in curbing inflation or not? Why? Indeed, I do. And about time, too. In a micro-economy such an institution would be more effective and expeditious.
If the Maltese GDP’s contraction continues in this way and the inflation rate does not contract more, is there the risk of having a stagflation developing in the Maltese economy or not? Why? What would be the consequences of a stagflation on the Maltese economy, both in terms of output as well as job creation?
What concrete actions should be taken by the Maltese Government to combat the possibility of stagflation?
Your description of unfolding events will, in fact, intensify the contraction on account of the resultant higher deflator on nominal collected statistics.
“Stagflation” is really a euphemism – recession is much worse, especially in terms of loss of jobs and investments in the private sector.
Hence the need for the government to step in endeavouring to restore the equilibrium without, if possible, aggravating the already-serious budget deficit.
Cynics might well argue that Malta, with its inflation, would at least avoid a worse state of deflation, but is this sufficient consolation? I reiterate what I have already stated on several occasions: whereas the Government should not cut down on its capital budget, it should, however, conduct a serious exercise on how to save substantially on its recurrent budget, principally by suspending items of expenditure which are considered to be non-essential in the present circumstances and until the upturn eventually appears in sight.
John A. Consiglio “There are some product sectors where rampantly autonomous price rises are still the order of the day”
It shouldn’t really be cause for surprise that, despite the reduction in electricity bills, inflation still went up by 0.13 per cent on a month-on-month basis. Utility bills are not the only variable that goes into the NSO’s calculations of inflation.
There are so many other things, for instance, food, clothing, medicines and health care, transport, rents and housing, and so on and so forth. The basic weightings of the various components would also have a bearing.
With that as basic, I am then not at all convinced that inflation cannot be brought down – even if not to the same extent that it might now be coming down in Europe – if one were to take a close look at the to-end-customer pricing policies of many of our businesses.
There are some product sectors where rampantly autonomous, that is, not seriously checked, price rises are still the order of the day, for instance, medicines.
And so, yes, there is urgent need of an official, with-teeth, price watch agency or authority in Malta, and this is simply so on the ground that the evolution rates of business profits on one hand, and employees’ incomes on the other, in this country do not at all show that after-tax profits of many businesses – including many SMEs – have shown the tightening that individual worker take-homes have on the other hand seen.
Lifestyles of many businesses have certainly not taken the knock that those of many employees have, and either rampant tax-evasion is still the tune or, as I imply, the differences between the owners of, and the creators of, wealth in this country are still very very large.
One must also appreciate that the small size of our market is such that –despite all good will in the world – for overseas suppliers there is not much incentive to compete between themselves on price when selling to our importers.
Some differences there might be, but then there are so many operators in every category in Malta that – however much agents may project themselves as “big” importers – to the foreign exporter orders coming to Malta are still seen as essentially small in their overall production context.
So from there too – even when prices there may be coming down – product prices for selling to us will not be decreased as substantially as when the exporters sell to other countries in the EU hinterland, and possibly elsewhere too.
The key element in stagflation is that it is usually a period of continuing inflation combined with a recession or stagnation of economic activity. Many incorrectly say that stagflation is just having together high inflation and high unemployment, without, that is, considering the timing element.
So, before we all start going away blabbering about stagflation, let’s keep things in a proper perspective.
It is totally dependent on us to take those measures as a nation that will attack the problem from both sides.
If there is fat at some end of the social spectrum that badly needs to be brought down in such manner as will as ensure that jobs are retained, and price rises seriously studied and attacked, then we seriously need to attack that fat. The work-life balances of many families must also not be worsened.
The dangers to the economy if both prices and unemployment rise in unchecked manners over a long term stretch are obvious to everyone. Reduced purchasing power, from both price rises and loss of jobs, has, historically, always had serious social and political consequences.
Edward Scicluna: “There is an unmistakable proof that the cause was the energy price shock given last October”
What is your reaction to the latest inflation figures announced by the National Statistics Office (NSO) on Friday, which showed that despite the reduction in electricity bills, inflation still went up by 0.13 per cent over the previous month? As I warned last year such shocks arising from a one-time significant increase in the price of energy will take time to reverberate throughout the economy with various lags and multipliers.
Furthermore, if they would have created a degree of inflationary expectations, then you get into a dog-chasing-tail vicious circle, which would take longer to break.
What are, in your view, the main factors that are leading to a rising inflation consistently around the 4 per cent mark in Malta despite the fact that inflation in most of the Euro zone countries is contracting? Finding the real causes of inflation in a small open economy like Malta is very difficult to unravel. This time around however there is an unmistakable proof that the cause was the energy price shock given last October.
In your view, what concrete actions should government take to curb inflation in Malta?
This time around the Government should not find it difficult to reduce inflation by addressing its causes, since the world around us is in a deflationary mode. Its major task of breaking the inflationary expectations it built itself is more difficult.
Other countries’ experience has shown that this depends crucially on the consumers’ trust in the government. If the consumers believe the government when it says it wants to fight inflation, then the task is that easier to accomplish.
Do you agree with those who say that setting up of a price watch agency with name and shame possibilities on the same lines of the NECC would be effective in curbing inflation or not? Why? Let us not confuse price levels with price increases. Market distortions and monopolists keep price levels higher but are not the cause of inflation as defined by economists.
We have various authorities and regulators whose task is to keep price levels to what the markets in a liberalised economy would dictate.
We might have more agencies. Experience has shown me that it is the effectiveness of the authorities rather than their number which is the most important.
Of course, revamping the Office of Fair Trading and making it more visual, as the NECC of which I formed part, is an attractive proposition.
If not, what would, in your view, be a more effective mechanism to combat inflation? It is the Central Bank’s task up to now to be watchful and suggest policies to avoid inflation rearing its head. In my opinion it should have spoken out when the energy price shocks were suggested by the two ministers within the MCESD.
If the Maltese GDP’s contraction continues in this way and the inflation rate does not contract more, is there the risk of having a stagflation developing in the Maltese economy or not? Why? I do not foresee any stagflation but the damages our current inflation to our export competitiveness is enormous. It is auguring that we come out of the recession as a highly uncompetitive country with the EU.