What is the inflation outlook for the GCC?

Any employer in Qatar or the UAE knows that the main source of inflation in these countries is rising rents, followed by basic foodstuffs.

In short the supply of accommodation in these countries is too small to meet the demand, so the price, i.e. rent, of existing accommodation is going up. If the demand was not there, landlords would not be able to charge higher prices. Indeed, if demand slumped they would have no rent at all.

For foodstuffs the position is more complicated. Rising fuel costs have hit the producers of food, and these have to be passed on; and the surging value of the euro has increased the cost of many foods from Europe in dollar terms, and many other products from the biggest supplier of goods to the GCC.

In his latest private circulation newsletter Dr. Marc Faber outlines an economic theory of the cycle of inflation. This notes that the phenomenon starts with asset inflation (house price rises, share price increases, etc.), then turns to commodity price inflation (oil, copper, etc.) which is followed by consumer price inflation and ends with a wage-prices spiral.

He suggests that we have shifted out of the low-inflation environment of the past 20 years, and are at an inflection point where global economies return to the stagflation of the 1970s. This means low growth and rather high inflation rates. Perhaps this is better than the alternative of a deep global recession and economic slump.

In the GCC economies we seem to be quite advanced in the inflation cycle. Price rises have become so strong that the UAE President Sheikh Khalifa bin Zayed Al Nahyan has raised state salaries for nationals by 25%.

However, inflation is also defined as a monetary phenomenon with too much money chasing too few goods. And unless the supply side is also addressed (building more homes, etc.) then greater liquidity is more likely to raise the inflation rate, although higher wages should ensure a relatively better position for those who get them.

So where too next? Are we going to see hyper-inflation in the GCC economies? The adherence to US fiscal and monetary policy via the existence of pegged currencies should ensure that this does not happen, although low interest rate policies in the US are hardly helping to contain GCC inflation rates.

But the upward pressure on rentals and the cost of living in the GCC is not likely to end anytime soon. The investment now committed to the local economies is truly amazing, and is in itself an inflationary force driving up the cost of local services and supplies.

On the other hand, the pressures of WTO membership and a truly open economy should be able to suck in lowest-cost goods from around the world, and this will greatly assist in keeping costs down during this economic boom in the GCC.

But is higher inflation inevitable, and something of wage-price spiral with firms have to pay higher wages to keep their staff? It certainly looks as though that is where economic forces are pushing Arabia.