The persistence of prices in Malta

Abstract

This study investigates underlying trends in prices in Malta, linking the notion of price persistence with the search for a stable core inflation measure. This investigation is couched in terms of the European Central Bank's target of price stability. A trimmed mean index, rooted in cross-sectional data analysis, is derived from Maltese harmonised indices of consumer prices. The trimmed mean series is shown to be less volatile than official price indices. Inflation in Malta appears to be susceptible to international volatility, particularly energy and food components. On the other hand, the prices of certain locally provided services tend to be more persistent. The volatility in Maltese inflation rates is higher than other Euro Area member countries, betraying specific shock-response weaknesses in the Maltese economy. Local inflation rates register higher amplitudes, with shocks having a longer duration than in comparable Euro Area countries. While the European Central Bank uses harmonised indices of consumer prices for policy decisions, other unconventional estimators of underlying inflation can identify specific pressures experienced by an economy. Further analysis of these forces reveals the components most prone to volatility; a well designed measure of underlying prices identifies categories that exhibit persistence in prices. The benefits of using these measures to identify and understand these forces in an economy ought to be further reviewed by monetary authorities.