It’s also about peace of mind

People did not need statistics to tell them that every euro they were spending at the supermarket or the village grocer was buying less products. 

The feeling of having a lighter shopping basket despite spending the same amount of money as before was and is a reality for everyone. 

The cost of everyday needs has been on a steep incline for more than a year, partly fuelled by Russia’s invasion of Ukraine. 

The latest data from Eurostat showed that annual inflation in the euro area increased by 0.5 points to 2.9% in December. 

Malta’s annual inflation stood at 3.7% in December which although represented a decline of 0.2 points when compared to November, was still above the euro area average. There is, however, a caveat when comparing Malta’s inflation rate with the rest of the EU – we have to keep in mind the hefty subsidies government is dishing out to keep the price of energy and fuel stable. 

Maltese consumers and businesses have been insulated from the fluctuations in the price of energy that their European counterparts have had to endure. Indeed, the indiscriminate subsidies on energy and fuel may have created a false sense of security that allows people to remain wasteful in electricity consumption. 

This scenario means that the primary inflation drivers in Malta have been services and food. If energy and fuel are taken out of the equation, inflation in Malta would be comparably higher than most EU countries and food has been a constant upward driver. 

Any disruptions in supply chains and higher freight and transport costs as a result of conflict (the Red Sea attacks by Houthi rebels are the latest example) are bound to have a direct impact on an island economy that depends on shipping for most of its imports and exports.  

This context is relevant to understand the growing murmur of discontent among families over the erosion of their spending power as a result of rampant inflation. The shopping basket has indeed gone lighter because the euro is buying less. 

From a purely economic view, certain policies adopted by the government to pump more money into people’s pockets through generous handouts, may have also contributed to inflation – in common parlance, inflation means the economy is flush with cash. Distributing more cash irrespective of how well-intentioned this is, will simply fuel demand and contribute to inflation.  

However, a purely economic view fails to capture the pressure families have been facing to maintain their standard of living. And this pressure is not only being felt by pensioners and low-income families but now even by middle class families. 

One may argue that a downward revision in the standard of living is necessary across the board to recalibrate the economy and stop the vicious circle that keeps fuelling inflation. In short, an economist would likely tell you that people should spend less and consume less to stymie the demand part of the equation. 

This is easier said than done and will undoubtedly have social and political repercussions, which is why adopting a purely economic view is not ideal. Simply saying people should consume less will not solve the pressing issue of higher prices for staple foods that have to consumed regardless. 

What government can do to protect its finances and imbue a sense of reality is be more judicious in the manner it supports people. Subsidising the water and electricity bill of a middle-class family with an average standard of living in the same way as someone who owns luxury cars and a swimming pool does not make sense. If differentiating subsidies is too costly an exercise because of the administration it requires, other ways should be found to make the richer classes pay more for their luxuries. This is not a road government wants to take, at least for the foreseeable future but one it may be forced to take further down the line. 

Instead, the government has opted for a price stability agreement with major food importers and supermarkets. The agreement is limited to 15 food categories and does not include personal care products, special dietary alternatives and baby formula milk. Nonetheless, it is a positive development. 

The agreement is based on a 15% reduction on the recommended retail price (RRP) set by importers and producers in October last year when they were oblivious of government’s intention to secure such a deal. 

The big supermarkets would normally be selling at prices below the RRP given they handle large volumes that allow for bulk discounts. This means that the price differential for consumers in most cases would be minimal at supermarkets. In the smaller chains, the price reduction for consumers is expected to be higher since in most cases these outlets would charge at the RRP. 

Government’s decision to encourage village grocery stores to join the agreement by introducing a €125 monthly grant for these small, family-run outlets is important since consumers could benefit from lower prices closer to their home. 

It is also positive that the agreement has a nine-month time window. This will not only deliver lower prices on staple foods but also provide stability over the next nine months, which hopefully will give family budgets some reprieve. 

But government must ensure that the market watchdog is able to monitor the situation and intervene if cartel behaviour is spotted among commercial operators that choose to make up for loss of profits on the staple foods by unjustified increases on other items not listed in the agreement. 

The price stability agreement has the potential to give people some peace of mind. The positive psychological impact on ordinary people of such an initiative cannot be underestimated. This is not something that can be quantified in monetary terms. But the agreement also shows that the government is willing to listen to and address people’s concerns on inflation even if this entails adopting temporary unorthodox measures.