A report published on Wednesday revealed that food inflation in Malta contributed more than 100 per cent to the overall increase in headline inflation, making it the worst affected euro-area country in this regard.

The latest Quarterly Report on the Euro Area (QREA) shows that the euro-area economy has to contend with strengthening external headwinds, even though it is being resilient, particularly as a result of strong growth in emerging markets.

The report also looks at why growth and inflation have become more stable in industrialised countries in recent decades – a phenomenon economists refer to as the “Great Moderation”.

In its focus section, the QREA argues that east Asia could take inspiration from the European economic and monetary experience to the benefit of the region, and indeed the whole world.

Joaquín Almunia, European Economic Affairs Commissioner, said: “The euro-area economy continues to face strong headwinds, including persistent uncertainties about the duration and the ultimate cost of the financial turmoil, a weakening US economy and surging commodity prices. And, in spite of its sound economic fundamentals the euro area is starting to feel the pinch”.

Euro area GDP growth decelerated from 2.6 per cent year-on-year in the third quarter of 2007 to 2.2 per cent in the fourth quarter. This deceleration owes much to a weakening of private consumption on the back of surging consumer prices.

In February, inflation was running at 3.3 per cent, up from 1.7 per cent in the summer of last year. However, continued strong growth in investment supported by high capacity utilisation and the high profitability of the non-financial corporate sector is encouraging.

According to the European Commission’s interim forecast of February 2008, economic growth in the euro area is expected to slow down to 1.8 per cent this year.

The report states that one of the main factors affecting recent euro-area inflation developments has been the large rise in energy inflation, mainly caused by an increase in oil prices over the last year.

Euro-denominated oil prices have increased by about 54 per cent over the past 12 months, reaching 63 euros per barrel in January 2008 (in dollar terms the increase was 72 per cent).

However, according to the report, the impact of energy inflation on the overall increase of headline inflation in Malta was negative. Among the euro-area countries, the highest contribution of energy inflation to the increase in headline inflation in 2007 was recorded in Germany, Ireland, Holland and Slovenia. The impact was null in Belgium and negative in Malta.

However, food inflation – which registered a marked increase across euro-area countries last year compared to the period 2000 to 2006 – contributed more than 100 per cent to the overall increase in headline inflation in Malta and about 40 to 45 per cent in Belgium, Slovenia and Luxembourg.

On the other hand, food inflation contributed to less than 20 per cent of headline inflation in Holland and France

The report goes on to say that one of the factors contributing to cross-country differences is the relative cyclical position of euro-area countries and differences in retail market structures.

“Malta, for instance, imports almost all of its food supplies. Consequently, fluctuations in global food prices have a significant impact on inflation developments. In addition, due to its small size a few food importers dominate the market, thereby hindering effective competition.”