Inflation: a new challenge for Gulf business?

How do you measure the rise in the cost of living? Economists in industrialized countries are not a lot of help, and official measures can also be highly misleading.

HSBC's US Economist Ian Morris has adjusted US inflation to account for asset inflation and comes up with a figure of 5.5%, the highest US inflation level since 1982. Yet this is not the figure that Fed Chairman Alan Greenspan would quote in his famous monologues on the economy.

Likewise in the UAE officials will quote around 5% as a reasonable estimate for inflation last year, but in the next breath somebody will proclaim that rents went up by 26%, and are still heading upwards in 2005.

Officials in Qatar recently concluded that inflation last year was around 8.5% but some observers cite 25% as a more reasonable estimate.

The problem is that not everyone is in the position of UAE nationals working for the government. This week they got a 25% pay rise from May 1, while non-nationals in the public sector got 15%.

In the private sector wage rises have started, with 6% seen as a good increase for 2005. But with the public sector now setting a new standard, private sector employers are going to have to follow suit.

This has the seeds of a wage-price spiral of the sort that has not been noted in industrialized economies since the 1970s. Then the wage-price spiral resulted in stagflation - low growth and high inflation. But this is hardly the likely outcome in the Gulf states with their booming oil economies.

More likely we are seeing a transformation to higher wage economies in this region. It stands to reason that as an economy booms its people will become richer. The quid pro quo is that the cost of housing and eventually all products and services will also rise.

Think Switzerland, think Hong Kong - price levels are much higher than in the Gulf states, and this anomaly can only be corrected by localized inflation, particularly as the regional currencies are pegged to the US dollar.

In this scenario house and share prices will go a lot higher, and inventory management is a problem for many businesses. But there is an upside in rising revenues and more sales.