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Network News • 26-05-2022

Horror images of inflation lurk from the 70s

Author: George Mangion - Senior Partner PKF Malta
Published on Business Today: 26th May 2022

The Retail Price Index shows an increase of 5.67% in food price in the last quarter. Quick to the rescue, weeks prior to last general election, finance Minister Clyde Caruana promised to tackle the impact of rising prices on struggling low-income earners. He was confident that studies on a secondary COLA relief system will soon be ready – a feather in his cap.

So far meetings were held with all stakeholders at MCESD and one waits for a revised COLA mechanism. Many ask: is this delay purely a result of the start of hostilities last February in Ukraine by Russian armed forces which were ordered to invade and occupy Ukraine land mass? This invasion has disrupted the export of wheat, cereals and other items such as fertilizers given that ports at Mariupol and Odessa are being bombarded while approaches to the ports have been mined.

Compared to global food prices in 2020, these soared 28%, on an annual average, for all of 2021 compared to the previous year, according to a statement recently released by the United Nations Food and Agriculture Organization.

This is partly attributed to the high cost of energy, high freight charges and the ongoing restrictions partially caused by the global COVID-19 pandemic and meteoric rise in fossil fuels. Such factors leave little room for optimism about a return to more stable market conditions this year.

Recent figures from the OECD, indicate that inflation is at a 25-year high, largely driven by soaring food and energy prices. China’s industrial production, has witnessed its gauge of lower activity in the manufacturing, mining and utilities sectors – a drop of 2.9 per cent.

Back home, importers and wholesalers had been reluctant to quantify the price hikes, but Times of Malta reported that a conservative estimate would be 15% on the average bag of groceries. The question rises whether Malta can afford to borrow more to help quell the rising tide of imported inflation when exports are on a plateau.

The answer is that the island is highly leveraged. The European Commission had warned Malta on its high corporate debt levels way back in 2012/3. Our rate of inflation is artificially skewed by the government’s decision to absorb the bulk of the additional costs for energy and basic commodities such as wheat, grains, fertilizers and animal fodder.

Naturally, subsidies protect households and ease costs of production, but they impact public finances negatively. Hence, subsidies can only be a temporary solution as the country cannot afford to borrow more millions after the two-year stint of generous subsidies during the pandemic. It is relevant to mention how the Hungarian Prime Minister last year announced that his government would cap the prices of six basic foodstuffs in order to fight rising inflation. This may not come as a surprise given the sudden rise in essential food items.

As can be expected, the wholesalers and importers lobby in Hungary objected to this directive saying consumers may be negatively affected by the decision, as shops will compensate for the losses on the six products by increasing the prices of others. Most label the ‘robbing Peter to pay Paul’ scheme as a futile exercise that will not solve the basic problem of imported inflation. For these reasons, it is not clear how consumers would benefit from the cap while having the prices of other products in their basket rise significantly. This does not mean that the State should not judiciously intervene in the free market to help stabilise prices.

As can be expected, enhanced social instability is triggered by inflation linked with reduced mobility due to Covid health measures and disruption caused by sanctions linked to the Russian invasion. In Hungary, the government contends that the recent price caps are capable of reducing inflation by 2 percent.

Opponents to the cap, argued that it is better to reduce vat on consumer purchases but the Fidesz government disagreed with tax cutting- saying it would only benefit retailers and would not percolate to consumers, which is the goal of the current measure.

Take the situation in the UK. It reported a 40-year high inflation rising to nine per cent in April, as food and energy prices spiralled upwards. Can history teach us a lesson as to the effectiveness (or otherwise) of state intervention to control imports and reduce cost of essential items. Our finance minister has created a one-time buffer of €20 0million to activate an energy price equalisation.

Another sum of €75 million will be assisting farmers, herders and others to quell increases in wheat, cereals, fodder and fertilizers. To quote from past experience, our sorrows pale by comparison to times of late seventies in Malta when double digit inflation was laced with chronic unemployment.

Back now, it is noticeable to quote the EY Malta 6th Future Consumer Index. This has found that, locally, the immediate effect of high inflation is understandably forcing many consumers to cut expenses on non-essential goods and services, including cosmetics, clothes and travelling.

Much social research has pointed to the phenomenon of high-consumption societies also having high levels of personal anxiety, stress, depression, hypertension and heart disease. Many people work longer hours, at times hold more than one job, sacrifice leisure time and sink themselves deep into personal debt just to have more stuff, use the latest gadgets, drive bigger cars and live in terraced homes with large mortgages.

Unfortunately, the more financially distressed have to economise on essentials like food to make both ends meet. The quick solution to balance our books of state is the expected rebound of tourist arrivals. Party apologists wax lyrical about the return of visitors this month once the health authorities have toned down entry conditions at airport.

Yet, at a sectoral level, tourism is bound to face challenging times due to promotional offers by competing countries such as Cyprus, Rome, Greek islands and Turkey. In conclusion, economists are watching closely to see if consumer spending (via an induced feel-good factor aka “Blockchain” Malta) can be encouraged to outpace inflation. Slower spending would drag down the economy’s growth and to prime the pump, this can only mean increased taxation which goes against the political credo of the elected political party.

Author: George Mangion - Senior Partner PKF Malta
Published on Business Today: 26th May 2022
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