Inflation is the watchword for 2004

Take the news headlines today. Leading paper makers plan to raise prices. German giants face earnings erosion on euro. Higher transport, energy costs lift inflation. Chips and drugs push Singapore into the fast lane.

These are all inflation stories. And the twist in the tale for the Arab World is a huge dependency on European imports married to US dollar-linked currencies. A devaluing US dollar versus a rising euro equals inflation.

One thing that will mask inflation in the Arab World, and the oil states of the GCC in particular, is the lack of statistical information. But this is a false friend, as not seeing reality until it hits you is small compensation.

It is thus incumbent on local business to prepare for inflation. This means readying business systems for price increases, and a careful watch on imported price levels. In business there are no prizes for being the last to pass on a price increase.

This is already happening. The 6,700 apartment Jumeirah Beach Residence project in Dubai pushed its prices up 20-25 per cent in December. Good news for those who bought real estate early, a tragedy if you were just about to put down a deposit.

Yet herein lies another lesson for 2004. The buyers of real assets - local shares, gold, other commodities and real estate - are in for a ball.

For inflation in the Gulf States is happening against a backdrop of an economic boom. Under these conditions one man's price rise will be another man's wage increase, and consumer price inflation will rapidly spread to asset price inflation.

Not often is such an obviously favorable investment scenario so evident. It will, of course, come to an end in future years like all booms. But things have hardly got started yet.

Some GCC stock markets look cheap, like the UAE and Bahrain. Dubai real estate is one fifth the cost of Southern England. Gold could go a lot higher as a traditional hedge against inflation. Even oil may have another excellent year as global economies recover.

So for 2004 make inflation your friend and not foe, and participate in this boom. This is the time to get in, not the time to head for the door.