Energy subsidies keep Malta’s inflation rate lower than European average

Malta has once again registered the lowest inflation rate in the European Union, with prices in July 2022 being 6.8 per cent higher than a year prior, as compared to 8.9 per cent higher in the Eurozone.

The main element keeping inflation lower in Malta than elsewhere in Europe is revealed to be the energy subsidies paid by the Government, which have so far prevented any increases in utility bills.

When looking at the data for June, when the Eurozone registered a year-on-year inflation rate of 8.6 per cent, Malta’s was 2.5 percentage points less, at only 6.1 per cent.

However, with energy prices and unprocessed food taken out of the equation, the euro area saw an inflation rate of only 4.6 per cent, whereas Malta’s registered no real change at 6.2 per cent.

This means that if energy prices are excluded, Malta is registering higher inflation than elsewhere in Europe.

The Central Bank of Malta’s (CBM) chief economist Aaron G. Grech, in comments made in April, said the bank’s investigations into Malta’s inflation rate found that if energy were to increase in line with European prices, inflation would be similar to that experienced on the continent – without factoring in the downstream effects of such a price increase, indicating that it could also be higher.

It is not known for how long the Government can continue subsidising energy and fuel costs, which is a very significant expense for the country.

Central Bank governor and former Finance Minister Edward Scicluna has previously warned against the full subsidisation of energy price increases: “Pricing sends a signal to consumers, and it’s an important facet of choice that should not be lost. An increase in energy prices tells consumers, ‘There’s a problem with the source, with the supply, so please use it sparingly.’ That’s a mechanism that is crucial, and best conveyed through pricing.”

In response, current Minister for Finance Clyde Caruana likened increasing the cost of energy at this stage of the post-pandemic recovery to a driver speeding down a highway suddenly braking.

“It’s the same thing if we had to increase energy prices right now. We cannot impose something like that onto the consumers or the economy because otherwise we would undo all the efforts we would have carried out throughout the pandemic,” he said.

The European Context

Malta and France, both at 6.8 per cent, were the only countries recording inflation below eight per cent. Finland, Sweden and Italy had the next lowest rates in the EU, at eight, 8.3 and 8.4 per cent respectively.

At the other end of the scale, the Baltic countries – on the border with Russia – are experiencing the highest inflation rates. Estonia registered price increases of 23.2 per cent, Latvia 21.3 per cent, and Lithuania 20.9 per cent.

European Economic Area countries Switzerland, Iceland and Norway have also been affected, albeit to a lesser degree, recording 3.3, 6.4 and 7.3 per cent annual price increases respectively.