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MCED Working Group Report on Inflation
22/10/1997
The following is a report issued by Malta Council for Economic Development Working Group regarding inflation submitted by Forum for a Better Economy.
REPORT OF THE M.C.E.D. WORKING GROUP ON INFLATION
1.0 Introduction: A Definition of Inflation
Inflation refers to a persistent rise in the average level of prices. Several governments have made the control of inflation the centrepiece of their economic strategies. Their success can be gauged by the fact that the rate of inflation in most of these nations has fallen to the lowest level registered in decades.
2.0 Measuring Inflation
In Malta, as in several other countries, inflation is measured by the Retail Price Index (RPI). There exist other indicators of inflation, a number of which are listed below. Some of these, which are marked with (*), are unavailable here in Malta because of lacunae in the existing statistical database.
The consumer expenditure deflator.
· The Implicit Gross Domestic Product (GDP) deflator.
| · Unit value indices for imports and exports, which cover the | prices of imported and exported goods.* |
| · Wholesale price indices which cover prices charged at the first | stage of bulk distribution and generally include import prices.* |
| · Producer price indices which track prices of locally produced | goods at the factory gate.* |
| Other symptoms exist which may complement information on the | existence of inflationary pressures. These include fluctuations recorded in wages and earnings of workers, productivity indices and regular surveys of price expectations of manufacturers and/or retailers. |
3.0 Causes of Inflation in Malta
| Inflation consists of two important elements, these being a domestically-generated | component and an imported one. It is however sometimes difficult to distinguish between the two. The Central Bank prepared and presented notes to this Working Group on the imported and domestically-generated components of local inflation. This Working Group considers this to be an important first step in disaggregating these two relevant components. See Appendix. However, the Central Office of Statistics (COS) has been requested by this Working Group to undertake a similar exercise adopting a different methodology from that used by the Central Bank. The COS will be analysing trends in the RPIs sub-indices to determine the extent of the domestic and imported components of inflation separately. |
| Movements in the domestically-generated component of inflation are | caused primarily by excess aggregate demand, high unit labour costs and/or cost-push factors. |
| Excess aggregate demand may be caused by a number of factors, the | two most important of which are relatively high consumers' expenditure and large government budget deficits. |
| · High unit labour costs caused by the tight labour conditions | induced by excessive public sector employment. |
| · Cost-push factors include: (a) state-induced costs and (b) the | prevailing structure of levies, which inflate the prices of imports and which encourage domestic manufacturers to raise their own prices. |
| Imported inflation, which is represented by the increase in the | prices of foreign-made goods and services when valued in local currency, may also be considered as an additional cost-push factor due to its impact on the prices of raw materials imported for local use as well as capital goods. Imported inflation is highly influenced by inflation in the source markets as well as exchange rate fluctuations between Malta and the other nations involved. |
4.0 Effects of Inflation
| High rates of inflation have a number of negative effects on | economic functions by: |
| reducing a country's competitiveness in international markets. This | is especially the case in an open economy like Malta; |
| · discouraging investment by increasing the uncertainty of future | real rates of return and discounting; |
| · redistributing income from lenders to borrowers as well as from | those on fixed income, such as welfare recipients, to wage-earners; and |
· hindering the operation of the price mechanism.
5.0 Recommendations
The following are the recommendations proposed by this Working Group.
5.1 Measuring Inflation
| This Working Group recommends the compilation of all the indices | highlighted in Section 2.0. |
| · It is thus imperative that the quality of statistical data be | improved. The non-availability and/or unreliability of certain statistical information is hindering the computation and use of a number of indices and is thereby limiting the economic analysis that may be undertaken. |
5.2 Policies to Contain Inflation
| Fiscal discipline is imperative. This Working Group feels that | government has to reduce potential sources of waste throughout its structures as well as impose a qualified freeze on public sector recruitment for a period of time. Moreover, government should also strive to improve the collection of tax revenue as well as raise the efficiency of public sector employees. Training programmes may thus be introduced to facilitate inter-departmental re-assignment of human resources. |
| · Government should strive to improve the co-ordination of its | fiscal, debt-management and monetary policies. The required administrative structures may have to be improved or even set up if inexistent. Moreover, this Working Group also encourages the formulation of econometric models of the Maltese economy. |
| · This Working Group also feels that to liberalise further the | existing trade regime and improve the responsiveness of aggregate supply to fluctuations in demand, the government should undertake the gradual dismantling of the prevailing system of protective levies. It is felt that these levies represent a major source of inflation as they directly raise the prices of imports and encourage domestic producers to increase their own prices. |
| · Government should strive to improve efficiency in State | controlled enterprises. This should enable them to reduce the prices they charge for the goods and services they produce or help in reducing the government's budget deficit. |
| · Regulators should be appointed to oversee the pricing policies | adopted by companies not falling under the provision of the Competition Act of 1994. Such regulators should be given the power to investigate cases involving restrictive practices. |
| · This Working Group also feels that a 'Consumer Ombudsman' should | be appointed. One of the ombudsman's main tasks would be to disseminate market information amongst consumers so as to facilitate the function of the price mechanism. |
| · Provided government visibly adopts measures to contain | inflationary pressures, then it becomes possible to formulate wage guidelines acceptable to all concerned parties. Such guidelines may involve the computation of a sustainable rate of increase in wages which may be utilised during negotiations related to collective agreements. |
6.0 Research
The Working Group recommends that research be encouraged to evaluate the impact of the recommendations being made.
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