x Abu Dhabi, UAETuesday 25 July 2017

A long-term approach will attack inflation

To properly get food, housing and education costs under control, an innovative and comprehensive approach is needed

As most families can testify, the cost of living in the UAE is rising. This feeling, of having less money remaining than at the end of the previous month, is backed by statistics, released last week by the Statistics Centre-Abu Dhabi (Scad), that showed Abu Dhabi’s inflation rate rose to a three-year high in February, pushed up by food and housing costs.

Now, as The National reported yesterday, more companies are under pressure to increase the education allowances to their staff, as prices increase. Nearly a quarter of companies in Dubai and a fifth in Abu Dhabi intend to increase their educational allowances this year.

Under such circumstances, calls for wage increases are understandable. And yet, from a long-term economic perspective, such increases beyond the rate of inflation are less useful, potentially pushing the economy into an inflationary bubble.

What, then, can the government do? With the UAE’s currency pegged to the US dollar, the ability to use interest rates to influence demand is not an available weapon. What needs to happen, therefore, is innovative policy. That policy should be focused on the three main drivers of inflation in the UAE: food, housing and schooling. For most UAE residents, that is where the bulk of their salaries go.

Food prices are difficult to influence, unless the government artificially keeps prices low, which this newspaper does not believe is good policy. Food prices are going up globally and so the UAE needs to invest in food security, as it is doing by buying farms around the world. The cost of housing is rising because of an imbalance between supply and demand – the solution is to build more apartments, especially those suitable for young families, and houses. The municipality of each city should take care to ensure a mix of properties, not merely luxury villas and ocean-front apartments.

On education, there is, again, a question of supply and demand. There is a global shortage of qualified teachers, which we can do little about, but, in cities such as Abu Dhabi, there is also the distorting effect of large corporations booking school places, sometimes for years at a time. The government can also look for innovative ways to build more schools, such as offering low-interest or interest-free loans to school companies, or building schools and then leasing the building to companies.

It is a package of measures, rather than any one attempt, such as raising educational allowances or spiking wages, that will bring down inflation in the long term.