Inflation, rental costs and school places worry Gulf business

Even more worrying perhaps is that local capacity constraints are now a main driving force behind GCC inflation levels and not just inflation imported by buying European goods with a weak US dollar.

Only last week UAE Economy Minister Sheikha Lubna Al Qasimi revealed that inflation hit 9.3 per cent in 2006. But so far in 2007 there has been little sign of the economy slowing down, while capacity constraints are beginning to be seriously felt for the first time.

School place shortage

School places are like gold dust for expatriates arriving this summer, and anybody who leaves this process too late is likely to be disappointed this autumn. It is not a question of rising school fees, which have already surged well above the general rate of inflation, but the physical availability of school buildings let alone teachers.

The seven per cent cap on Dubai rentals has been effective in dampening the wild inflation of rents seen in the past few years. But apartments and villas still change hands frequently in expatriate economies, and each time that allows landlords the opportunity to re-set rentals to higher and higher market rates.

Delays to the delivery of major housing projects has kept the available market of property tight at a time of booming demand in Dubai, and it is even worse in neighboring Abu Dhabi.

This summer several major housing developments are coming on stream in Dubai, in particular the 6,500 apartments in the Jumeirah Beach Residence and The Palm Jumeirah shoreline apartments and villas. Local residents hope this will mark the high water mark for rental inflation.

Going home

One further distortion of inflation is that it causes expatriates whose services may be badly needed to pack up and go home, just because they can not afford to live in the Gulf or find it financially no longer attractive. Ironically enough that will mean that employers have to pay even more for a replacement, sending inflation still higher.

This is the classic wages and prices spiral of inflation. People need more money due to inflation so employers have to charge more to pay them and pass that cost on to consumers who then demand higher wages and so on. Capacity constraints in an economy amplify this effect still further, and before long you have a serious problem with inflation as it becomes entrenched with a continuous cycle of price increases.

How do you solve inflation? Well the only way to do it is to cut back an economy to the level at which it can grow without causing inflation. That can be done either through higher interest rates or the introduction of taxation, or a recession which is the natural economic correction to excessive growth but the most painful solution.