The week’s really bad news was – no, not the fuel price hike, or the increase in gas prices, or the rise in the price of milk. In my opinion, the worst news of the week was the Eurostat announcement that the surge in the rate of inflation last November puts Malta up there along with the ‘EU delinquents’ (Bulgaria, Hungary, Greece, Romania – together with new eurozone member Estonia).

The 3.4 per cent annual inflation rate is very worrying, considering that in the next months the price increases announced this week, plus their foreseeable widespread ramifications, will continue to push the needle upwards.

One must also consider that the euro area annual inflation was 1.9 per cent in November, unchanged from October and that the EU annual inflation was 2.3 per cent in November, also unchanged from October.

In Malta’s case the inflation rate shot up in November to 3.4 per cent from 2.2 per cent in October, 2.4 per cent in September and 3.0 in August.

The last time Malta was below the EU (not the eurozone) average was last June: since then it has been consistently over the EU average inflation rate.

Further analysis of the Eurostat figures shows that the two main categories where prices increased were in the fuel and energy category and the hotels and restaurants group.

I feel there is not enough wide appreciation what high inflation can do to a country’s economy, especially to Malta’s.

Ours is a open economy but recent experience has shown that inflation in Malta is not just an imported phenomenon – we also have a high quotient of local inflation inflators. That is why, over the past years, our inflation rate tended to be consistently higher than the European averages. And also why our policy makers and opinion makers need to be more aware of the dangers that high inflation can pose.

Inflation is also deceptively attractive – it is attractive to the government since it increases tax revenues by pushing the average tax unnoticeably higher due to the effect of marginal taxes. It also erodes the level of government debt in relation to GDP.

Inflation also erodes house owners’ liabilities and allows for some capital gain. Unnoticed by many, it allows for the reallocation of wages towards high productivity sectors without the losing parties realising their loss since their incomes will still be rising in nominal terms.

In other words, inflation affects most the lower classes, the people on benefits, on or below the poverty line. For despite all the annual fulminations about the COLA agreement between the social partners, that is at best a palliative offered post factum, a year later, and only based on an average.

The fact is that, statistically, over the past few years, wages in Malta (at least the minimum wage) has barely kept up with the rate of inflation. Malta is the only country in the EU, along with Germany, to have the lowest percentage increase in the minimum wage over the past years. If we really want to become competitive, the way to do that is by moving up the value-added chain, not by squeezing the lemon more.

The problem, thus, is not just that Malta is infringing a capital requirement of being a eurozone member, which aims at a maximum two per cent rate of annual inflation (even though this looks like the entire EU and maybe even the eurozone will go beyond this benchmark in the coming months), but also that this rate will further depress an economy which is deceptively strong but actually unbalanced and in deep need of a reform and possibly incentives to grow.

We all keep hearing the government mantras − how Malta has done well in the recession, how our rate of unemployment is among the lowest in Europe (true) and also about our rate of growth. But this is also deceptive at least in parts – most of our so-called growth is restricted to some high-end sectors of the economy and also fuelled by government expenditure. The rest of the economy is still struggling along – the SMEs, the local market-oriented sectors, even the tourism sector which, despite all the record tourist flows last year, is still recuperating after the disastrous 2009, and has huge inbuilt structural problems to face up to. And this year it faces the enormous Air Malta crisis.

On the one hand, this government has been quite good at keeping to its macro-economic targets regarding the deficit. It stood its ground against all when it decided that the cost of fuel imports must be borne by those who consume it. And it has taken some tough decisions to ensure the viability of energy production in the coming years.

Even so, it now has huge problems with handling the decisions. First of all, come the end of each month, we are growing anxious awaiting the ‘decisions’ regarding fuel prices. At least we have been promised that most of the oil for 2011 has been hedged as far as electricity prices go. But that does not cover fuel prices for transport, this being a car-intensive country for all its smallness (and its ramshackle public transport system).

Announcing price increases at the end of the month gives an unsalutary shock to the system. That, and of course, the capital blunder of the honoraria increase which has enraged all except the beneficiaries. The system of price increases being vetted by an authority or other does not seem to be working even when the authorities issue belated information defending the price increases. Nor does the government seem credible when it compares, again belatedly, price increases against those in other countries. There are products that are cheaper in Malta than in other countries, but there are also products that are even dearer. And there are products where the price increases have been far steeper than in other countries. And one must also factor in the salary structures as they exist in real terms in Malta.

This government seems to have lost sight how to prepare people for coming shocks, or rather how to try and sensitise public opinion to the hard decisions coming. It seems to first announce the blow, then act surprised when everyone rises up in anger.

That’s a pity, especially when the past week also included the unnoticed good news that the Swiss National Bank no longer accepts Irish government bonds as collateral for its money market operations, while Malta issued treasury bills with no problems at all.

Nor does it seem adequate to promise some relief in three months’ time. The government has to focus on the real plight of the people, not just the pensioners and the people on social assistance but also the many working class people (and also most of the middle class) who cannot make ends meet. The recent bounce of consumer spending over Christmas must not let anybody imagine economic growth is that easy to achieve – with some coloured lights and carols on loudspeakers.

Finally, here is more bad news – a table in the Daily Mail, which showed Malta as the ‘Neet’ capital of Europe (Neet = young people ‘not in employment, education or training’). It may well be, as our sister paper got from Eurostat that the Daily Mail used the Eurostat figures wrongly, but it is also true, that Malta does fare worse than the other 26 EU states when it comes to early school leavers, even though it has seen an improvement from 2003’s 49.9 per cent to 2009’s 36.8 per cent.

We have a long way to go. A long way.

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