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4 maltatoday | SUNDAY • 14 JANUARY 2024 NEWS NEW data reveals that the in- flation gap between lower and higher-income groups has reached 'historical highs,' caus- ing significant concerns for the economic well-being of low-in- come households. According to a policy note by the Central Bank of Malta, the inflation gap between the top 25% earners and the lowest 25% earners has exceeded the his- torical average, peaking at 1.2 percentage points in August, surpassing the previous gap of around 0.2 percentage points. Inflation is experienced differ- ently between income groups due to their different spend- ing habits. Low-income groups tend to spend a higher share of their income on essentials like food and housing, while high- er-income groups spend a high- er share, compared to lower-in- come counterparts, on luxuries like restaurants and hotels, rec- reation and culture, and trans- port. Since inflation rates include changes across different cate- gories, the inflation rate experi- enced by lower-income groups might be higher due to, say, foodstuffs taking up a larger share of their income. As a re- sult, inflation gaps persist be- tween households depending on their income. The policy note states there is a notable discrepancy be- tween the official inflation rate and the rate experienced by the lowest income groups, reaching 1.3 percentage points in Au- gust. These gaps mark the sec- ond-highest recorded dispari- ties since 2013. The inflation gap is primarily driven by rising costs in essen- tial areas like food and rent. The lower income and retired households are facing a higher inflation rate than their wealth- ier and younger counterparts. Food inflation, which holds a significant share in the con- sumption basket of the lowest income group, has played a piv- otal role in skewing their infla- tion rate. Additionally, rent in- flation surpassed food inflation as the primary driver of the gap since July 2023. Retired households experi- enced an inflation rate of 8.1% in December 2022. The infla- tion gap between the young and retired has also widened over the past two years, peaking at 1.5 percentage points in the winter of 2022 – the highest re- corded gap since 2010. Notably, lower-income and retired households are facing a similar inflation rate. Without top-up benefits and the refined additional Cost of Living Ad- justment (COLA) mechanism, pensions would have suffered a significant decline in purchas- ing power. Similarly, those on the minimum wage also lost part of their purchasing power over the past two years. In the policy note, research- ers said the additional COLA mechanism should ensure that declines in purchasing power during inflation spikes are tem- porary, in the absence of sec- ond-round effects. All weekly pension rates, in- clusive of bonuses, experienced some devaluation in 2022 due to the backward-looking nature of COLA and the lack of in- crements in statutory bonuses. However, considering all bene- fits, minimum pensions saw an increase in their real value in 2022, despite historically high inflation. On the other hand, maximum pensions experi- enced a slight deterioration in real value in 2022, even with ad- ditional top-ups over and above COLA. The CBM policy note was written by Aaron G. Grech, Ian Borg and Valentina Antonaroli. Inflation inequality between income groups reaches 'historical highs' Central Bank policy note details the difference in inf lation experience between low and high-income groups. NICOLE MEILAK reports. Food inflation, which holds a significant share in the consumption basket of the lowest income group, has played a pivotal role in skewing their inflation rate According to a policy note by the Central Bank of Malta, the inflation gap between the top 25% earners and the lowest 25% earners has exceeded the historical average