Last Updated on Thursday, 25 January, 2024 at 10:44 am by Andre Camilleri
The issue of Food inflation and it being the primary reason for having overall inflation has been a major part of public discourse in the past days. So, I decided to analyse a bit more deeply the actual composition of the Retail Price Index to provide some insights as to what is actually happening.
So as a starting point the overall annual RPI based inflation rate as at December 2023 stood at 3.6%. From this 3.6%, the food component within the RPI contributed 1.86% of the said 3.6%. At face value this would support the claim that food inflation is the main cause of the overall inflation, contributing to just over 50% of the overall 3.6% annual inflation.
However, digging deeper into the food component within RPI, one finds that out of 1.86% annual food inflation contributing to the overall inflation, there is 0.42% coming from served meals and take-aways. There is then a further 0.27% coming from Vegetables, a 0.16% coming from Fruits and a 0.102% coming from Biscuits. Adding all these together indicate that out of 1.86% annual food inflation contributing to the overall inflation, 0.95%, so just over half of the RPI based annual food inflation, is coming from the mentioned categories i.e. served meals, take aways, vegetables, fruits and biscuits. With the exception of biscuits, the rest of the categories have nothing or very little to do with food importers, as whilst we do import vegetables and fruits, here there is also an element of local produce which is also having an effect on prices.
From the remaining categories, the ones that left most impact on the RPI based food inflation where then Milk and Bread products.
From such a deeper analysis of the RPI, one sees another important element that is fuelling inflation. This is Rents. Rent costs are the 3rd item/category that had the highest percentage increase in prices during 2023 (+17%), only preceded by Vegetables (+30%) and Potatoes (+24%). Rent costs have multiple ripple effects on other items which in turn effect inflation and it is likely that the increase in served meals and take aways is heavily impacted by the increase in rents. This besides the fact that rent costs also have a strong social impact. It is interesting, when one considers the heavy increase in building stock supply, mainly through apartments, that rent costs have continued to increase. This is likely linked to our present economic growth model which has continued to bring to Malta various foreign workers, thus still fuelling the demand for renting accommodation.
All this resonates with the conclusion of a recent CBM Policy note entitled “The cost of inflation: How has the recent surge in inflation impacted lower-income households in Malta?” which outlined that “Moreover, rent inflation has been very dynamic throughout 2022 and 2023, which has also contributed positively to the gap between the two groups. Indeed, since July 2023, this has overtaken food inflation as the main driver that explains the gap between lowest and highest income group inflation rate.”
Ultimately, in an economy everything is linked. Inflation cannot be tackled by just trying to do something, with dubious effectivity, on just a single sector. It requires a holistic approach, through policy decisions that tackle structural issues in our economy.
