The recent divergence of food inflation in Malta

Inflation continues to remain high on the national debate agenda. As I had shown a fortnight ago, inflation in goods and services is on the decline in Malta and lower than in the euro area. This trend continued with the latest data published last month by

However, citizens’ view on inflation is usually somewhat conditioned by those goods and services that they purchase frequently, like food and fuel. Given that prices of energy-related products have remained stable in Malta, the debate has been largely focusing on food inflation, and with good reason.

As I had shown a fortnight ago, after the third quarter of 2023, food price inflation has been diverging with respect to inflation in non-energy industrial goods and services. However, it has also been diverging from food inflation in the euro area. Both trends continued in January where food inflation (including alcohol & tobacco) in Malta rose further by 0.4ppts to 8.7%, while in the euro area and Cyprus it eased by 0.4ppt and 0.6ppt to 5.7% and 3% respectively. In Italy food inflation remained relatively stable at 5.6%.

Most food products consumed in Malta, including unprocessed food like fruit and vegetables, are imported, as the domestic agricultural and food production sector is relatively small. Therefore, movements in prices of food products are largely conditioned by the cost of the product manufactured or harvested abroad, together with transportation costs incurred to ship them. Other elements that could impact food prices are domestic rents, labour costs and the profit mark-up.

Given the divergence in recent inflation trends between food and non-energy industrial goods and with food inflation in another Mediterranean island state, transportation effects do not explain such divergence. Indeed, such factor is not featuring in the debate as a cause of such divergence. Similarly, rents should have a similar impact on imports of goods with wages on both goods and especially services. Therefore, these factors do not appear to justify the divergence between food and goods and services inflation.

Here I focus on the imported cost element of food inflation. This time, I construct a food price inflation index based on weighted average price developments in seven euro area countries that together account for two thirds of all Malta’s food imports, reflecting the latest available (2021) World Bank food import shares data by country for Malta. Italy alone accounts for a third of all food imports in Malta, while the Netherlands, Spain, France, Belgium, Germany and Greece together account for another third of all food imports.

Chart 1 (below left) shows that based on this calculation, food inflation in Malta (excluding non-alcoholic beverages) between January 2022 and October 2023 broadly followed the same trend as that of food import trading partners but diverging since the last two months of 2023.

This divergence is more evident when one displays (Chart 2, below right) the ratio of food inflation in Malta to that of food import trading partner countries. A ratio of one (1) would indicate that inflation is identical in both jurisdictions. During the first half of 2022 food inflation in Malta was much higher than in food import trading partners, though on a steadily declining path. However, between mid-2022 and October 2023, a stretch of around 15 months, this ratio hovered close to around 1, indicating that during this period food inflation in Malta broadly was in line with the weighted average of its food import trading partners. After October 2023 it deviated markedly.

Indeed, the Table (above) shows that between January 2022 and October 2023, both the median and average ratio of food inflation in Malta to that of food import trading partners stood at close to 1, indicating no significant divergence in inflation. Even when distinguishing between processed (which includes non-alcoholic beverages) and unprocessed food, the ratio remains close to 1, though the average for unprocessed food was slightly higher.

However, in the last two months of 2023, the ratio for both processed and unprocessed food rises somewhat to around 1.4, while for the overall food index (which unlike processed food, excludes non-alcoholic beverages) it rises to almost 1.5, indicating that in the last two months food inflation in Malta was almost 50% higher than that of Malta’s main food import trading partners. This trend is likely to have continued in January of this year given the latest Eurostat data.

Inflation is driven by either scarcity of supply, cost push factors or demand factors. As regards to the former, supply bottlenecks that were evident during Covid have over the past year disappeared. Domestic cost push factors, such as rent and wages are a phenomenon that usually impact all sectors, with wages usually impacting more the labourintensive ones, like services. Given that inflation in both goods and services is declining and stand at a much lower rate of 1.8% and 2.9% respectively (January), transportation, rents and wages cannot explain rising food inflation at 8.7%. Moreover, food inflation in the euro area as a whole and in Malta’s major source market of food imports is declining and stands at a much lower rate of around 5.6%.

The only remaining factor to explain this divergence is profit mark-up. The rise in food inflation of recent months can only be explained, as indicated a fortnight ago, by the ability of suppliers, in the face of rising food demand from growing employment and tourism, to maintain higher mark-ups that were documented in 2021 and 2022 or possibly raise them further, because of low sensitivity of demand to price changes, given that food is a necessity, and market structure weaknesses.

The announced arrival of a new food supply chain is a welcome development as it should generate downward pressure on mark-ups in the sector. On the other hand, while the proposal of cutting consumption taxes produces a one-time direct mechanical downward impact on the price index (assuming such tax cuts are fully passed on to the consumer), nevertheless any expansionary fiscal policy is fundamentally inflationary. Therefore, continuing with the path of fiscal consolidation is not only desirable to rebuild fiscal space for future economic shocks, but also helpful to fight inflation.