The Inflation Experience of Low Income Households

Consumer price inflation in Malta is officially measured through the Retail Price Index (RPI). The RPI calculates the price change of a basket of goods and services, which is derived from average expenditure shares obtained through the Household Budgetary Survey (HBS). In practice, the representation of an “average†household is skewed towards high income households, whose expenditure makes up a relatively larger share of total consumer spending. As a result, the RPI might not always accurately measure the inflation rate faced by low income households, whose basket differs from the overall average for all households. This study uses HBS data to calculate an estimated inflation rate for household in the bottom income quartile. The results suggest that between 2010 and 2020 these households experienced some periods of higher inflation than suggested by the official rate. This was particularly so during periods of rising food and energy prices in the first half of the sample period. A similar result was found for retired household, who form a large subset of low income household. Despite this, an analysis of the minimum wage and the minimum pension suggests that benefits have maintained their purchasing power since 2010, even when accounting for higher inflation. In part, this was due to ad hoc government allowances on top of automatic annual increments.