Businesses learn to live with inflation

There is always something to spoil a party, and this year for the Middle East's oil boom that has been inflation. But this unwelcome guest is unlikely to leave anytime soon.

But business is learning to live with inflation as the price of high rates of economic growth. And for sectors like banking and real estate inflation can be very good news, if managed correctly.

The high oil price is both a cause and consequence of inflation. Rising oil prices feed directly into transport and air-conditioning costs. Then again the high oil price is as much a result of lax US monetary policy as supply side fundamentals.

It is the huge change in US monetary policy since last August's sub-prime crisis that has boosted inflation of commodity prices - too much money chasing too few goods. In contrast, not a great deal has changed on the supply side since last August. It was tight then and it is tight now.

Petrodollar inflation

Middle East business managers might seem to be in an enviable position with liquidity flowing into the economy through petrodollars. The trouble is that more money is now chasing too few goods and prices are rising very sharply across the board.

To avoid a squeeze on profit margins managers need to pass the increases on and raise their own prices, and as quickly as possible.

At the same time, some effort to control input costs must be made. Can staff be sourced from countries with cheaper labour? Note the way in which many hotels have upped the proportion of Chinese staff.

Accommodation - both for staff and business premises - is another big issue. Relocation to cheaper offices or even outsourcing some functions to another country might be considered.

Profit challenge

For a good manager it should always be possible to squeeze a profit out of a revenue stream. If there is no revenue stream, that is when you have a problem!

However, the days of making an easy profit in the Middle East are over, although looking back to a golden age is usually an illusion and not always the way old hands remember.

On the other hand, high-cost locations like Dubai and Doha are going to have to become far more productive in their use of labour.

This kind of cost pressure has driven labour productivity upwards in the industrialised world to an enormous degree, and it will do so in the Middle East. It is another phase in the development cycle, although it will eventually act as a break on levels of GDP growth.

See also:
Why rising inflation will trigger a bond market rout
How to make money in the Middle East