x Abu Dhabi, UAEWednesday 24 January 2018

Inflation likely to rise, but can still be tamed

Rising prices are a concern but there is little chance that inflation rates will run wild once again.

From the price of a sack of tomatoes to a tank of petrol, consumers will soon be feeling a pinch in the pocketbook. Inflation hit a 16-month high according to official statistics reported in The National today. Food and energy prices, as well as the weakening dollar, may push rates even higher, but the UAE has tools to keep them in a manageable range.

In an economy going through a low-growth period, high inflation could drive domestic spending on non-essentials into the ground. Consumers have already noticed higher prices: "Life is getting more and more expensive by the day," Yousef Khamdan, a shopper at LuLu Centre in Abu Dhabi, told this paper last week.

Unfortunately for Mr Khamdan and others like him, there is no immediate relief in sight. The UAE and the GCC countries as a whole import more than 70 per cent of their food, leaving them vulnerable to spikes in food prices. Poor harvests from the United States to South Asia will be felt across the region.

Increasing petrol prices, and the knock-on effect for transport costs, will also take a bite, although that may subside in coming months.

Another underlying cause is the slumping US currency, which has fallen to 15-year lows against some currencies. Because of the dollar peg, the GCC's economies are bound to the vicissitudes of the US currency. Today, the dirham buys less than it once did as a result.

The peg also limits monetary policy that other economies use to curb inflation, but the UAE has other options at its disposal. In the past, food prices especially have been kept in check by straightforward price controls. In the long term, administrative and banking policy can reduce the currency in circulation, meaning there is less money chasing the same amount of goods that are available.

What should be remembered is that the increasing inflation rates are starting at a low baseline because, for almost two years, the UAE had been stuck in a period of pressure from lowering prices. That was a necessary adjustment - in 2007 and 2008, inflation was in the double digits, partly based on the property bubble, which has since proved unsustainable.

There are global pressures pushing prices higher. But the Emirates is a more grounded economy than it once was. Rising prices are a concern, but there is little chance that inflation rates will run wild once again.