Wages to rise by €13 per week as inflation worries persist

Wages are set to rise by almost €13 per week in January on the back of persistently higher inflation despite government’s hefty subsidies on fuel and energy.

The mechanism that determines the cost of living adjustment is currently showing a weekly wage increase of around €12.70, according to economist Philip von Brockdorff.

The increase will be finalised when the RPI for August is published tomorrow. If confirmed, it will be the highest ever COLA increase to be awarded, beating last year’s record of €9.90.

The COLA mechanism is tied to price changes between September 2022 and August 2023 as measured by the retail price index (RPI).

Wage rises are mandated by law, causing concern among employer organisations that the hefty increase in their wage bill will in turn push prices up.

“Wage increases can fuel inflation, but the major drivers remain supply issues, logistical costs and mark-ups by producers to make up for loss of income in the COVID years,” Von Brockdorff said. He also noted the international price of oil has increased again, creating a global ripple effect on several industries.

Timing of subsidy withdrawal ‘hugely critical’

Von Brockdorff said the subsidies government is forking out to keep fuel and energy prices stable remains important to mitigate the higher inflation but warned there is growing pressure in the EU on governments to scale back support.

He said the big question is for how long can fuel and energy be subsidised the way Malta has been doing so for the past two years.

“The Finance Minister has already said he intends to maintain the subsidies but the decision when to withdraw them is going to be hugely critical because it could lead to an increased bout of inflation and cause the economy to slow down,” Von Brockdorff said.

Philip von Brockdorff

Fuel prices in Malta have remained stable since June 2020, making them the cheapest across the EU. Electricity tariffs have remained unchanged since 2014 after government stepped in last year to keep consumer prices stable when a fixed price arrangement with Electrogas expired.

Inflation in Malta has remained stubbornly high despite consumers being cushioned from price hikes in fuel and energy. According to the last published RPI, prices in July increased by 4.7%, down from 5.4% in June. This was the lowest annual rate since March last year.

But the index showed that the highest annual inflation rates were registered in housing (+8.9%) and food (+8.8%).

Joseph Muscat pens Economic Note

A recent Economic Note penned by former prime minister Joseph Muscat with research by Sagalytics and published on LinkedIn, paints a gloomy picture of how people are dealing with inflation.

All surveyed households reported an increase in the cost of living, with the median perceived price increase registered between €20 and €50 per week over the past six months.

“This is even more considerable given the fact that the median weekly expenditure has shifted onto a higher category, that of between €150 and €199 per week,” the note reads.

The findings suggest that price increases no longer rest with one-off hikes for essential goods but reflect “a materialisation of expected future price increases that result in inflationary pressures”.

The post-pandemic recovery in consumption also appears to have halted with consumers “cutting back on discretionary spending in light of these pressures”.

“A majority indicates that if price inflation of necessities is to continue in the near future, they would have to cut back on their consumption patterns together with an interestingly higher percentage of respondents who would request a pay rise or work harder to maintain their current standard of living,” the note states.

Contrary to the pressure being made by the European Commission on governments to scale back energy support, a vast majority of those surveyed believe that government should continue to subsidise energy prices.

Reflecting on the survey findings, Muscat sounds the warning that increased usage of precautionary savings and a willingness to maintain standard of living either by requesting higher pay or increase service provision rates, could present “an imminent concern” of a wage price spiral.