Despite low expected inflation rates coming out tomorrow by Eurostat, the renewed escalation of the war in the Persian Gulf risks pushing inflation back onto an upward trajectory in July. Eurostat’s preliminary estimate has already placed Euro-area inflation at 2.8% in June, down from 3.2% in May, while Malta’s rate is estimated to have fallen from 2.1% to 1.9%. The full June figures for the euro area and individual member states will be published tomorrow.
These figures, however, are backward-looking and do not fully capture the latest escalation in the Persian Gulf. Brent crude was trading at approximately $84.50 per barrel today, close to a one-month high, as renewed hostilities and restrictions on shipping through the Strait of Hormuz revived fears of further disruption to global energy supplies.
The European Central Bank had already anticipated that inflation would deviate further from its 2% target because of higher energy prices. It raised its three key interest rates by 0.25 percentage points in June and revised its euro-area inflation forecast for 2026 upwards to 3%. The ECB has explicitly warned that higher energy prices are expected to feed into food, goods and services inflation.
Malta’s direct energy subsidies may temporarily shield households from the immediate impact of rising oil and electricity prices, but they cannot insulate the wider economy indefinitely. Higher fuel, freight, refrigeration, fertiliser, packaging and production costs are eventually transmitted through the supply chain. Local food inflation may therefore continue to face upward pressure even while the headline rate remains artificially suppressed by subsidised energy prices.
Additional inflationary pressure is also emerging from outside the energy market. The global shortage of memory chips, driven partly by growing demand from artificial-intelligence data centres, has already increased the cost of consumer electronics and disrupted international supply chains. These pressures may not dominate Malta’s inflation figures, but they add to an increasingly difficult external environment.
Meanwhile, the Labour Party entered the election with an extensive list of subsidies, cash payments, tax reductions and property-purchase incentives.These included a mortgage-interest subsidy covering up to 25% of a first-time buyer’s property value, an annual €1,000 “super bonus” for workers and further welfare and housing subsidies. The Malta Chamber warned during the campaign that the bidding war between the political parties risked undermining fiscal sustainability and worsening Malta’s dependence on permanent government support.
Introducing further demand-side subsidies while inflationary pressure is returning risks producing the opposite of the intended result. Large subsidies for property purchases, in particular, may simply increase buyers’ spending power in a housing market constrained by limited supply. Sellers and developers can then absorb much of the subsidy through higher prices, leaving the taxpayer to finance another increase in property values while affordability remains largely unchanged.
Subsidies cannot replace structural reform in housing and infrastructure. Malta can sustain a growing population only if that growth is accompanied by significant investment in transport, utilities, healthcare, schools, drainage, energy generation and affordable housing. Instead, the government continues to expand recurrent expenditure while Malta’s ageing and overloaded infrastructure struggles to serve the population already living on the islands.
Finance Minister Clyde Caruana intends to reduce the debt-to-GDP ratio and eventually deliver a balanced budget or surplus by the end of the decade. However, it remains unclear how he intends to restrain an expanding government expenditure bill while responding to economic contingencies that were not incorporated into his original projections. The latest NSO figures, show that the general government deficit reached €339 million during the first quarter of 2026, while expenditure increased by 14.5% compared with the same period in 2025 with revenue trailing at 2.2%.
The government is therefore attempting to pursue several contradictory objectives simultaneously: expanding subsidies, increasing recurrent expenditure, supporting continued population-led economic growth without infrastructural growth, suppressing inflation through price controls and reducing the deficit. Eventually, the numbers will have to reconcile these promises with reality.
Newsroom
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