Inflation is a tax on the poor – Claudio Farrugia

The recently released National Statistics Office (NSO) report on Retail price index (RPI) reveals worrying developments. Since February, the index has started an upward trend and is rising rapidly.

The prices of the most essential items, including clothes and shoes, household equipment, household maintenance and food, are well over three percent. These levels are certainly a cause for concern. Unlike children who may hide under the covers to escape the wrath of an imaginary monster, inflation cannot be avoided. It pushes low-income people deeper into the poverty trap.

Uncontrolled inflation terrifies economists. When economies overheat, the purchasing power of consumers is drastically eroded. Uncontrolled inflation tends to set off vicious spirals.

After a long period of near-stagnation in prices and the decline of the pandemic, the rise in inflation initially suggested a return to economic growth. This gave rise to cautious optimism. However, with the exponential rise in inflation, it has become a global problem.

A widely held principle is that price increases of around 2% per year are considered relatively healthy. Central banks tend to support this level of upward price movements in an economy. This rate is usually followed by increased demand, higher production and gradual wage adjustments. However, when price increases exceed this threshold, the economy goes into turmoil and purchasing power quickly erodes.

The negative effects of inflation mainly affect the poorest families, which are disproportionately affected. People with higher incomes often compensate for price increases with increased incomes. Price increases are often higher for basic needs than for luxury items, a phenomenon economists call “inflation inequality”.

At a recent seminar jointly organized by the Central Bank of Malta (CBM) and the Malta Chamber of Commerce, one of the CBM representatives gave a well-documented presentation on the impact of inflation on households low income. It has been argued that the spending habits of people with different income levels vary considerably when it comes to the retail price index. The speaker stressed the need to develop a price index based on the basket of goods purchased by low-income households. It has also been suggested that this index should guide policy makers on how to extend social benefits beyond cost of living adjustment (COLA) to maintain the purchasing power of low-income people.

Additional funding to promote the social economy and the establishment of a living wage should provide more effective solutions. These are effective mechanisms that ensure that the work is profitable. The social economy enables people who would otherwise have difficulty finding permanent employment to become productive. The living wage offers a structure that goes beyond the COLA. It offers a better wage adjustment system that targets low-income people in particular.

Inflation pushes low-income earners even further into the poverty trap-Claudio Farrugia

It is hoped that the announcement by the Minister of Finance of a supplement to COLA for low-income people is not a simple pre-election sound sample. However, this is not enough to lift a number of people out of poverty. Failure to provide workers with sufficient wages to lead a decent life is nothing less than exploitation. With higher rates of inflation, the financial situation of low-income families is increasingly stressed as they face rising costs of basic necessities. Their purchasing power is eroded, which has a negative long-term effect on their livelihoods.

Pope Francis has often called for “a basic income or a salary so that everyone in the world can have access to the most basic necessities of life”. This system, which is supported by a number of reputable economists, empowers low-income workers to lead a decent life and contribute more to an economy.

A virtuous cycle of rising inflation, adequate employment prospects and wages is essential to the common good in which an equitable distribution of wealth is promoted.

Before concluding this article, I would like to express my sadness at the passing of Sandro Spiteri, a leading member of Catholic Voices Malta. He was the one who inspired, trained and encouraged me to start writing opinion pieces. Sandro’s many friends and family will miss his energy, enthusiasm and commitment to justice. We offer our deepest condolences to his grieving family.

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