Could 2022 be a ‘Year of Inflation’?

As Malta draws towards the celebration of a New Year, there seems to be a certain current of unease among the business community. In itself, this is entirely natural; 2022 also promises to feature a General Election; and inevitably, such events always entail periods of economic uncertainty.

Moreover, the country is still coming to grips with the effects of the COVID-19 pandemic: with all its disruptions of business, in the form of lockdowns and emergency health and safety regulations.

Nonetheless, the complaints and misgivings that have recently been expressed seem to go beyond such considerations. Specifically, more and more representatives of the business community have been stepping forward to voice their anxiety over one specific issue, above all others. That is, that costs for Maltese business – especially freight, local transport, and industrial production – have been on an unprecedented steep climb since August, with no apparent end in sight.

As Malta Chamber president Marisa Xuereb put it: “Imported inflation, the higher price of imported goods as a result of supply chain disruptions and higher costs of freight, is the major concern of most companies and small businesses in Malta.”

And unlike the purely speculative concerns caused by other issues, this problem already seems to be confirmed by available statistics. For instance, according to Malta’s industrial price index – which monitors the selling prices of leading products from a sample of 80 large enterprises - in August, industrial prices for intermediate goods shot up by 8% over the same month in 2020; then 9.6% in September and 9% in October.

Likewise, costs for non-durables – food, clothing, fuels – have been rising steadily all throughout summer by 4% to 6%.

While few voices have come out and openly said so, in as many words: there is a very real, very palpable fear that the first months of 2022 may usher in an inflationary recession, of the kind that would directly impact consumers at all levels.

As far as the dislocation in the global supply chain is concerned, the root cause remains the COVID lockdown. In reality, however, that disruption has lingered on, even beyond the lockdown itself. If the effects have not so far been felt, this most likely has to do with the 2020 government hand-outs: which not only prevented large-scale job-losses, but also kept Maltese consumer confidence up throughout the crisis.

Nonetheless, the lockdown reduced spending across the board; and this low demand dovetailed with the drain of foreign workers and the international slowdown on global freight shipping. But now, as Malta – like the rest of Europe – tries to adjust to a ‘new normal’, the sudden increase in demands for goods and services simply cannot be met by a supply-chain that has been so severely curtailed. This, it seems, is the reality facing many businesses today.

With the lockdown over, and people wanting to get back to normal, the supply chain has been overwhelmed. People want to spend money; but businesses are now struggling to hire back the foreign staff they had at low costs; whilst also dealing with steadily increasing freight and transportation costs.

Matters are not helped by a stagnation in local wages, either; even if industry actors like Brian Muscat - general manager of carton producer Multi Packaging – warn against any direct government intervention in the labour market.

“The next six months are crucial,” he told this newspaper. “Everyone knows food prices are increasing. How much more can they increase when consumers start reacting to the increases? And if there is pressure on wages, then it will be bad news. I fear the government does not have the tools to intervene in the market at this stage.”

On this latter point, Mr Muscat may well have a point. But it does not mean that there are no tools available at all, to counter this particular threat. In his own words, “Malta needs support from the EU, because the island cannot be competitive with the rest of the mainland.

”Indeed, this was a solution proposed by the Nationalist Party last September: when – with uncharacteristic foresight, it must be said – the Opposition spearheaded an effort to petition the European Commission for a state aid fund of €40 million for Maltese businesses and SMEs, whose logistics costs increased drastically over the course of the pandemic.

PN candidate Stanley Zammit even homed in directly on the crux of the entire matter: arguing that “the prices have increased by 2.3% for the consumer and 2.9% for the manufacturer, while the wages have remained stagnant.”

To date, it remains unclear whether the Labour government has ever given any consideration to this proposal; or indeed, if it is even deliberating any course of action at all.

Nonetheless, Prime Minister Robert Abela and Finance Minister Clyde Caruana will no doubt be keenly aware of the problem; and for obvious reasons, both will be equally keen to ensure that an all-important election year, will not get off to such an inauspicious start.

One can only hope, then, that the government will sooner or later address these serious concerns; oterwise, 2022 may prove to be conspicuous less than a ‘Happy New Year’.

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