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The inflation phenomenon isn’t a threat to GCC countries

Omar Al-Ubaydli

Published: Updated:

US consumer price inflation has reached its highest level in four decades and is rising in several other advanced economies. However, in the GCC countries, it remains low, as their governments have avoided the substantial monetary stimulus packages that Western countries implemented following the 2008 global financial crisis.

During December 2021, many of the world’s largest economies registered concerning inflation levels such as: 5.3 percent in Germany; 5.6 percent in India; 7.4 percent in Mexico, and 7 percent in the US

In contrast, the inflation rate in GCC countries was of the order of 2 percent or lower. This was perfectly aligned with the target levels of advanced economies such as Australia, Japan, and Norway.

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One of the leading monetary economists of the 20th century, Milton Friedman, famously – and correctly – affirmed that “inflation is always and everywhere a monetary phenomenon.” He meant that for prices to rise for an extended time, it must be the case that the money supply is increasing.

In the days of the renowned inflation-causing British monarch Henry VIII (16th century), the money supply was the volume of physical currency in circulation.

Still, in 2021, the money supply is primarily determined by electronic deposits whose value dwarfs the hard cash you use to purchase groceries.

When Friedman was writing about inflation, it was out of control: in the US, it averaged around 10 percent during the 1970s, reaching 15 percent in specific years. While the rise in inflation recently observed in many countries is alarming, it is too soon to classify it as the sort of “sustained” inflation that has intermittently plagued countries such as Argentina and Turkey during the last 50 years. Therefore, per Friedman’s maxim, attributing the current bout to monetary causes might be jumping the gun.

However, since 2008, the same countries suffering inflation have partaken in the most significant expansions of the monetary supply in human history to stimulate the economy. For the most part, this has manifested itself in a very narrow form of inflation: a bubble in financial assets, especially stocks. But it would not be at all surprising to see it impacting conventional consumer prices, too, as part of an inadvertent hat-tip to the aforementioned legendary currency debaser, Henry VIII.

US Senator Elizabeth Warren's claim that corporate greed is to blame for inflation is wide of the mark, Omar Al-Ubaydli suggests. (File photo: Reuters)
US Senator Elizabeth Warren's claim that corporate greed is to blame for inflation is wide of the mark, Omar Al-Ubaydli suggests. (File photo: Reuters)

The Gulf governments did use the same monetary stimulus methods deployed by Western central banks, both in the wake of the 2008 financial crisis and during the COVID-19 pandemic. However, the scale has been far lower because the GCC economies are structured very differently to economies like Canada and Italy and therefore do not respond as much to monetary stimulus. This is part of why inflation has been so mild in the GCC.

Moreover, the GCC countries (except for Kuwait) operate a fixed exchange rate with the US dollar. Maintaining that peg – especially during the post-2014 oil price collapse – has been challenging, and expanding the money supply much slower than the US helps support the fixed exchange rate.

COVID-19 has contributed to various supply chain disruptions that have raised the price of imported goods. Moreover, lack of investment in the hydrocarbon sector has led to rising oil prices, as producers struggle to keep pace with recovering demand. In Western countries, these are clear proximate causes of inflation, too.

One thing that has remained constant is politicians’ willingness to deceive the general population when talking about the causes of inflation. As I remarked in an earlier article, US Senator Elizabeth Warren is adamant that corporate greed is to blame for inflation. She is either lying or staggeringly incompetent.

The GCC has its unique inflation sources, such as Saudi Arabia’s decision to increase VAT from 5 percent to 15 percent and Bahrain’s decision to raise VAT from 5 percent to 10 percent. However, these lead to nothing more than short jumps in prices, and within a year, will have no further impact on inflation.

Moreover, the rapid growth of the US economy further helps the GCC economies maintain stable prices, as it increases the value of the US dollar and hence their currencies. Imports – which account for a substantial percentage of goods consumed in the GCC – become cheaper when the Saudi Riyal and Emirati Dirham appreciate, allowing Gulf paychecks to purchase a larger bundle of goods.

For the last 40 years, the twin policies of tying their currencies to the US dollar and disciplined management of the money supply have helped the GCC countries maintain low levels of inflation. This phenomenon persists today, as Western countries begin to pay the price for their monetary laxity and their politicians devolve into hysterical demagoguery.

Thus, the GCC countries would do well to heed the words of Marcus Aurelius: “If you are distressed by anything external, the pain is not due to the thing itself, but to your estimate of it; and this you have the power to revoke at any moment.”

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Disclaimer: Views expressed by writers in this section are their own and do not reflect Al Arabiya English's point-of-view.
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