Inflation from Cartelization Government’s Bugbear

In the field of economic management, the government does occasionally come across instances deserving some praise  -  mostly when international ( chiefly, E U ) institutions draw comparisons with other countries and come up with rankings.

The recent annual report for 2012 of the International Labour Organization ( ILO ) is a case in point.  When comparing performances between pre-2008  to end- 2011, the ILO groups Malta with Germany, Austria, Luxembourg and Belgium from the seventeen Euro Area countries as having actually increased their economies’ jobs from the levels they had reached before the onset of the global recession late 2007.  In contrast, the other twelve members have not yet recovered their job levels and with very grim prospects of being able to do so.  In fact the eurozone as a whole experienced a drop in its jobs in excess of 3.5 million.

The ILO report also notes that, percentage-wise, only in Germany there are fewer people seeking work than in Malta when compared to the pre-recession scenario.  Good.

But the ILO report doesn’t stop there.  It prints a mine of information concerning the whole world’s economic situation, at present and in the likely near future.  It assesses prospects for job creation as very bleak, and yet so desperately needed to get us out of the rut which could potentially degenerate into a state of depression, a state far worse than the ‘Great Recession’ we have been through and from which many countries have not yet recovered or, worse, have experienced double-dipping.  All this despite the multitude of unprecedented monetary and quantitative easing measures implemented in nearly all developed economies.  The ILO estimates at 50 million the number of jobs required to be created globally in order simply to return to pre-recessionary levels.  Frightening.

However, what really baffles Maltese economic analysts is the root cause of our perennially-high inflation rate rather than potential job losses in an economy where full-time employment is about to touch 150,000 with nearly 7000 officially declared as unemployed and with an activity rate of only 62% of those aged 15-64 years.

Until last year our high rate of inflation was conveniently ascribed mainly to increasing tariff rates for electricity, gas, water and fuel, not forgetting to add, by way of a half-hearted addendum, the impact (inevitably, of course ! ) of imported inflation.  Yet, it is this latter appendix which should really be investigated in detail because it appears that there exists a silent cartel among importers which could well turn out to be the cause of the excessive rise in our cost-of-living index.

Year-on-year the inflation rate up to June 2012 has been 4.4%, the highest in the eurozone and the second highest in all the E U , as measured by the Harmonised Index of Retail Prices, the one used by Eurostat for comparison purposes between countries.  The average in the E U has been stable at 2.4%  -  almost half of ours.

Luckily for the government, in Malta we tend to concentrate on the Retail Price Index (RPI) when measuring the inflation rate.  Even COLA does.  The rate climbs then down to an annualised 2.5%, still much higher than anywhere else in Europe , with a few countries even reporting a negative percentage so far this year  -  a dangerous state of deflation which is feared worse than a recession.

The lion’s share in Malta’s RPI stems from imports.  The Minister of Finance rightly commented on the EU’s recommendation to exclude the import element from COLA’s formula that this would in effect make it disappear completely.

When one considers that energy tariffs hardly moved over the last 12 months, one is justified in suspecting cartelization in the import sector.

The Competition Authority is in duty bound to investigate on its own bat, not waiting for someone to approach it.  But will it ?  I have my doubts.

Maynard