Real wages recover on paper, but everyday costs still bite

Real wages have largely recovered from the inflation shock following the pandemic and the energy crisis, but many households still feel worse off when paying for everyday essentials.

The prognosis comes from a new analysis carried out by a Central Bank of Malta economist, which covers the period between 2021 and 2025.

CBM Principal Economist Abigail Marie Rapa examined why official data showing a rebound in real wages does not always match consumers’ lived experience at supermarket tills and when settling monthly bills.

The analysis notes that while broad indicators such as the Harmonised Index of Consumer Prices (HICP) show that real wages—nominal wages adjusted for inflation—have returned to, and even surpassed, their 2021 levels, workers tend to be more sensitive to price changes in everyday goods and recurring expenses.

These Frequent Out-of-Pocket Purchases (FROOPP), which include groceries and regular household bills, rose more sharply at the peak of the inflation surge in late 2023 than broader price indices. When wages are measured against this “everyday” basket, purchasing power was still perceived to be below 2021 levels as of late 2025, the study found.

The squeeze on real wages was most acute between 2021 and 2023, as global supply imbalances following the pandemic and energy shocks linked to the Russia-Ukraine conflict drove inflation sharply higher. Because wages tend to adjust with a lag, real earnings declined significantly during this period.

As inflation moderated through 2024 and 2025, nominal wage growth began to catch up, supported by productivity gains and compensation claims by workers seeking to offset earlier price increases. By the third quarter of 2025, real wages stood nearly 5% above their 2021 levels.

The impact, however, varied across sectors. Public administration and defence experienced the steepest drop, with real wages falling more than 7% below 2021 levels at their lowest point. The services sector also recorded a decline of around 2%.

The public sector saw a marked rebound in late 2024 and 2025 following new collective agreements for teachers and civil servants, bringing real wages in the sector to 2.7% above 2021 levels by late 2025.

In contrast to the trends seen in many other European countries, real consumer wages in Malta’s construction and industry sectors remained remarkably resilient during the recent inflationary period. While these energy-intensive sectors across the euro area saw real wages fall and remain below 2021 levels as late as early 2025, real wages in Malta’s construction sector stood nearly 5% above 2021 levels as early as the fourth quarter of 2023.

This divergence is largely attributed to government intervention to stabilize energy prices, which shielded local producers and workers from the direct impact of global energy shocks that hampered similar industries elsewhere in Europe.

According to the report written before the war in Iran, the outlook is presently cautiously positive. With the labour market expected to remain tight and productivity gains projected to continue, real consumer wages are forecast to rise further.

By 2028, they are expected to be 10.8% higher than in 2021, potentially narrowing the gap between statistical recovery and households’ day-to-day experience of the cost of living.