Lies, damn lies and official inflation statistics

When a British Prime Minister in the mid-19th century told the House of Commons that there were 'lies, damn lies and statistics' he uttered an immortal truth. But there can be few more obvious verifications of this statement that the official inflation statistics of the Gulf today.

The true position is one of hyperinflation, particularly in Dubai and Doha but also in other GCC cities. The National Bank of Dubai caused an outcry in official circles last year when its economists said 15-22% was the market inflation rate, but privately officials think that 2006 will be no better.

Spiraling costs are everywhere: rentals rose by 38% in Dubai last year and this year's 15% cap on rentals has been side-stepped by landlords. Food costs have also jumped, and when you pay a restaurant bill this is only too clear. As for staying in a hotel, well they say Dubai prices are now among the world's highest. Schools have just applied for 20% fee increases.

Market price inflation

Even the cost of petrol for cars is up substantially in the UAE, despite the country sitting on 10% of the world's oil reserves. If you are in the building industry, construction costs are double what they were a few years ago, if you can obtain the materials and labor to get a job underway.

Now the only thing that has not escalated rapidly is salaries, except for nationals in public service who got a 25% rise last year. That means that disposable incomes are falling. However, so many expatriates have entered the Gulf to participate in the boom that a rising population more than offsets the impact of falling real salaries.

High inflation levels are not usually good for an economy. Those on fixed incomes suffer a painful squeeze on spending power, as do those on salaries that fail to rise with inflation. The winners are those with debts whose liabilities shrink in real terms, and those who own real estate or other assets that increase in value with inflation.

Inflation bad for equities

Inflationary periods are not usually good news for equities, however, as inflation also tends to eat into company profits as rising costs can not always be past on fast enough to keep pace. Stock markets therefore usually turn down on profit falls or the fear of them.

Indeed, the classic economic model of an economic boom concludes with high inflation as demand runs ahead of supply forcing up costs, and eventually the whole boom collapses under its own weight.

In the past inflation has usually been tackled by high interest rates but the Gulf currencies are all pegged to the US dollar and thus have limited scope to vary their interest rates. More basic market forces will thus emerge to dampen the rampant boom, and the current successive stock market crashes across the region could be seen in this context.