Issue link: https://maltatoday.uberflip.com/i/1468736
8 OPINION 26.5.2022 T he 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 elec- tion, finance Minister Clyde Caruana promised to tackle the impact of rising prices on struggling low-income earn- ers. 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 oc- cupy Ukraine land mass? is invasion has disrupted the export of wheat, ce- reals and other items such as fertiliz- ers 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 annu- al average, for all of 2021 compared to the previous year, according to a state- ment recently released by the United Nations Food and Agriculture Organ- ization. is is partly attributed to the high cost of energy, high freight charges and the ongoing restrictions partially caused by the global COVID-19 pan- demic and meteoric rise in fossil fuels. Such factors leave little room for op- timism about a return to more stable market conditions this year. Recent figures from the OECD, indi- cate that inflation is at a 25-year high, largely driven by soaring food and en- ergy prices. China's industrial produc- tion, 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 wholesal- ers had been reluctant to quantify the price hikes, but Times of Malta report- ed that a conservative estimate would be 15% on the average bag of groceries. e question rises whether Malta can afford to borrow more to help quell the rising tide of imported inflation when exports are on a plateau. e answer is that the island is highly leveraged. e European Commission had warned Malta on its high corpo- rate 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 commod- ities such as wheat, grains, fertilizers and animal fodder. Naturally, subsidies protect house- holds and ease costs of production, but they impact public finances neg- atively. 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 Hungari- an Prime Minister last year announced that his government would cap the prices of six basic foodstuffs in order to fight rising inflation. is may not come as a surprise given the sudden rise in essential food items. As can be expected, the wholesal- ers and importers lobby in Hungary objected to this directive saying con- sumers 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 import- ed 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. is does not mean that the State should not judiciously inter- vene in the free market to help stabi- lise prices. As can be expected, enhanced so- cial instability is triggered by inflation linked with reduced mobility due to Covid health measures and disruption caused by sanctions linked to the Rus- sian invasion. In Hungary, the govern- ment 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 re- ported 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 ef- fectiveness (or otherwise) of state intervention to control imports and reduce cost of essential items. Our fi- nance 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 unemploy- ment. Back now, it is noticeable to quote the EY Malta 6th Future Consumer Index. is has found that, locally, the immediate effect of high inflation is understandably forcing many consum- ers to cut expenses on non-essential goods and services, including cosmet- ics, clothes and travelling. Much social research has pointed to the phenomenon of high-consump- tion 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 lei- sure time and sink themselves deep into personal debt just to have more stuff, use the latest gadgets, drive big- ger cars and live in terraced homes with large mortgages. Unfortunately, the more financially distressed have to economise on es- sentials like food to make both ends meet. e quick solution to balance our books of state is the expected re- bound of tourist arrivals. Party apol- ogists wax lyrical about the return of visitors this month once the health au- thorities have toned down entry con- ditions 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" Mal- ta) can be encouraged to outpace in- flation. 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 polit- ical party. Horror images of inflation lurk from the 70s George Mangion George Mangion is a senior partner at PKF, an audit and consultancy firm, and has over 25 years' experience in accounting, taxation, financial and consultancy services. His efforts have made PKF instrumental in establishing many companies in Malta and established PKF as a leading professional financial service provider on the Island