Low-income earners should get separate inflation index

An inflation index for low-income households separate from Malta’s retail price index is needed to see how social benefits should be increased over and above the annual Cost of Living Adjustment (COLA).

The proposal was made by the Central Bank’s senior economist Jude Darmanin, who says the separate index can ensure that purchasing power of low-income households can be maintained while making such social grants more “transparent and effective.”

The index would be based on a more detailed “micro-level study” on the prices of the specific products purchased by low-income households, as well as their spending shares from the Household Budgetary Survey (HBS), to finally calculate a low-income household (LIH) rate.

The author warns that even the HBS may not be the most realistic way to assess how inflation is impacting on low-income families. This is because the sample population surveyed by the HBS is taken from the latest Census held in 2011, well before the population of Malta grew rapidly due to migrant inflows, “which may have significantly altered the household distribution away from that used in the HBS”.

Moreover the HBS, which is conducted every five years, is limited in its ability to capture changes in consumption patterns over time. A case in point was the change in consumption during 2020 caused by the COVID-19 pandemic.

Inflation has a sharply different impact on low-income groups, who are more likely to spend a greater proportion of their income on food.

But it turns out the gap between the two rates of inflation decreased after 2013 due to the “sharp drop and subsequent stabilisation of energy prices”.

Indeed the inflation rate faced by households in the bottom income quartile was only significantly higher than for the general population, during periods when food inflation was high, such as in the first half of 2010, and in 2013 when the difference peaked at over 1 percentage point during these two periods. That’s because low income groups spend 31% of their income on food, while the general population spends 23% of income on food.

Between 2016 and 2019, inflation for low-income households on average stood 0.1% above the official RPI, but increased to 0.7% during the pandemic.

The increase was mainly due to the sharp reduction in education tuition fees during the COVID-19 pandemic, since low-income households tend to make more use of state-funded education rather than private tuition.

But minimum wage still maintained its 2010 “real value” in 2020, largely thanks to the 2017 agreement between government and social partners for an additional supplement of €1 per week for persons on minimum wage. “In the absence of this supplement, the actual minimum wage in 2020 would have dropped below the LIH-indexed wage,” the report said.

Also, minimum pensions have enjoyed other increments apart from the COLA that increased their value, such as the Cost-of-Living-Bonus (CLBO) of 2008 and equivalent to one-third COLA; and other increments introduced from 2016 onwards. This raised the real value of pensions beyond the COLA mechanism, thanks to additional allowances.