Food inflation – Malta vs EU27
The starting point of the current efforts to tackle food inflation was the direct or indirect allegations of market failure, specifically that there is not enough competition in the local food market and that importers and retailers are engaging in collusive practices. Price variations were misconstrued for lack of competition, which is quite the opposite.
Moreover, recent technical analysis was mainly based on a limited view of Malta’s food inflation when compared to that at EU level, mostly positioning itself on the divergence seen from Q3 2023 onwards, at HICP level, between the overall level of food inflation in Malta when compared to other EU countries. Some, concluded on such a limited view, that this indicates that Malta’s food supply market is somehow showing an inherent weakness in the effectiveness competition within such a market. I find this rather funny, considering we are on the eve of yet another big foreign operator entering this market, which will handle the importation, distribution and retailing of its own branded products all over the island. This is when this food sector has been so far among the most fragmented sector we have in Malta, both at an importation and retail level. It doesn’t take much to realise that for an island with an area of just 317km2, we have supermarkets mushrooming all over the place, many of which are not just retailers, but also importers.
However, beyond all this, the data does not even support any claim that competitive forces are not functioning well in this market. To fully show this, we need to take a wider view as how food price cycles actually happen in Malta.
Below please find a graph outlining the difference between the HICP annualised monthly, core Food & core Food plus Non-Alcoholic Beverage, inflation in Malta and across the EU27 from August 2021 to December 2023. When the difference is in negative territory it means that Malta registered a lower annualised food inflation rate during that month and when the difference is positive it means the contrary.
The below graph clearly indicates not only the cycle of food inflation in Malta but also the fact that such cycle normally occurs with a fourmonth delay to the price cycle of food across Europe. Thus, while prices of food were increasing in Europe during the beginning of Q3 2022 until the end of Q2 2023, food prices in Malta were increasing at a lower rate as we were still taking advantage of lower food source prices that had been bought at lower prices before the mentioned period. It is then from the latter part of 2023 that the annualised monthly food inflation in Malta was increasing at a higher rate than Europe, likely as the food source price now reflected the higher prices that Europe experienced earlier on. However, this overview in trends clearly shows that rather than a malfunctioning market or a market with some inherent weaknesses, we have a food market which moves very much with European trends, with some obvious delays, as food suppliers tend to stock larger quantities to benefit as much as possible from economies of scale and reducing shipping costs. Added to this is the fact that rumours of attempts at price controls started early in summer, even before this divergence started manifesting itself statistically in August 2023. Such rumours may have motivated importers to reflect the true costs in their RRPs, rather than continue cushioning part of the imported inflation. Another consideration is the full recovery of tourism, which could also have played a part in the food inflation experienced over the summer.
The same cyclical trend can be seen if we take the food categories covered by HICP. So, we cannot even say that we have any food categories acting as some sort of outlier.
However, what is more interesting is that if we were to average the monthly annualised inflation difference, for each food category, from August 2021 to December 2023, the only three food categories which show an average positive inflation difference (meaning the annualised rate of inflation was higher in Malta than the EU27) were the “Fruits”, “Vegetables” and “Sugar, jam, honey, chocolate and confectionery” categories. As we all know both fruit and vegetable prices are affected by the price of local produce, the price of which is dependent on other things, beyond food suppliers. This was mainly so because of a high differential in inflation on these three categories before summer 2022.