Does Negative Inflation in Malta Signal Deflation?

Explanation for this year's negative inflation rate

Malta's National Statistics Office (NSO) recorded an annual inflation rate of -0.05% this July. This figure comes as a surprise, especially when compared to the previous year, when the rate stood at 2.08%. Effectively, Malta has shifted from positive to negative inflation. However, one should not immediately assume that this constitutes deflation (which would lead to a sustained devaluation of currency over time).

The primary reason for Malta's current negative inflation is a significant drop in the prices of water, electricity, gas, and fuel (-0.62 percentage points). The transport and communication sectors also saw price reductions (-0.25 percentage points). Conversely, prices in other sectors—such as leisure and culture, beverages and tobacco, household equipment, and home maintenance costs—saw slight increases. Therefore, it is mainly the reductions in energy, fuel, transport, and communication that have driven this year's negative inflation rate.

What does this inflation rate mean for businesses?

True deflation only occurs when the general price level falls over an extended period. Since the inflation rate has only now dipped into negative territory after some time, we cannot yet speak of deflation. The most pressing question for companies in Malta right now is how this rate will impact their business.

There are three likely scenarios: Customers might hold onto their cash, either because they expect prices to fall further in the future or because they are uncertain about their current financial situation. In the second scenario, consumer behaviour remains unchanged. The third possibility is that customers actually increase spending, fearing that prices will rise again in the future or that their savings might lose value.

For businesses, a crucial question is whether energy prices—which play a decisive role in electricity bills and transport costs—will continue to fall, or if this was merely a temporary dip. In recent years, we have seen constant inflation in energy prices. The question now is: can companies be certain that no further inflation is on the horizon?

Is Malta facing a deflationary spiral?

The biggest risk in such a scenario is the so-called deflationary spiral. In this cycle, reduced demand leads to lower production. Lower production means a reduced need for labour. Higher unemployment then leads back to even lower demand.

However, given that the Maltese government has actively reduced energy prices and continues to encourage consumer spending, it appears that Maltese businesses are well-positioned to continue operating successfully in the future.