The ghost of inflation has reappeared in western economies, with consumer prices in the US rising 8 percent annually. Despite having their currencies tied to the US dollar, the Gulf countries have thus far maintained low and stable inflation. A closer look at the reasons suggests that the Gulf countries’ monetary success will persist for the foreseeable future.
In western democracies, inflation is usually a dry topic, resulting in a depoliticized public discourse. However in 2022, left-leaning researchers and journalists are mortified by the prospect of Trump returning to office. As a result, leading media outlets offer distorted analysis of the current inflation surge, forcing ordinary people to work harder to gain an accurate picture.
There are five main reasons for rising consumer prices. Increasing energy prices, especially oil (and hence gasoline); logistics-related disruptions to global supply chains, many of which are due to Covid-19; labor shortages in western countries because people are reluctant to reenter the post-pandemic labor force; fiscal stimulus leading to a sharp rise in consumer spending; and rising food prices due to geo-political stresses, most notably the Russian-Ukrainian conflict. The result is inflation not seen since the late 1970s.
In contrast, the GCC countries are witnessing stable inflation of around 2 percent, which is virtually on target. This is initially puzzling since the GCC countries have pegged their currencies to the US dollar, and they also have a much higher dependence on imports, meaning a higher exposure to the aforementioned supply chain disruptions. Four factors explain this success.
The first is that fuel and electricity prices are much more stable in the GCC than in western countries. In some, such as Bahrain and Kuwait, they remain heavily subsidized and nominally fixed by the government; and even in Saudi Arabia and the UAE, where prices are more responsive to global fluctuations, the absence of green taxes mean that the variation has a considerably smaller impact on a family’s budget.
The GCC’s climate is also helping, albeit temporarily, as fuel prices have spiked when Americans and Europeans are consuming energy to stay warm, while people in the Gulf are enjoying temperatures of 25℃ that require neither heaters nor air conditioners.
The second reason is the unique structure of labor markets in the GCC. Most of the world’s countries have labor forces where local citizens account for at least 80 percent of employment, with minimal opportunities for migrant workers to plug holes. In contrast, the GCC countries have labor forces that are dominated by migrant workers (75 percent or more) who can be easily hired now that borders are open again.
Thus, a US restauranteur bemoaning the reluctance of his compatriots to take up waiting jobs vacillates as attracting workers requires a sharp rise in wages. In contrast, a GCC restauranteur has access to a virtually inexhaustible supply of Indian and Filipino waiters whose services can be procured without the need for a wage rise.
Third, the GCC countries deployed a large range of fiscal and monetary instruments in dealing with the pandemic’s economic fallout, but they did not offer household-level cash transfers like the US. As a result, GCC households are not looking to spend an unexpected windfall on the latest car or smartphone, meaning lower pressure on consumer prices.
Finally, for residents of the Gulf, inflation has maintained its status as a largely boring issue. The VAT rises in Bahrain and Saudi Arabia during the last year did cause a bump in prices, but it was a one-off rise that cannot be compared to the creeping inflation underway in western countries. Critically, this has ensured that GCC monetary policy has remained technocratic and depoliticized.
The same cannot be said of the US, however, where the Federal Reserve Bank has been quite dismissive of the threat posed by inflation during the last year, and has only now decided to check consumer prices by raising interest rates.
While there are no smoking guns lying around, given how cranky incumbent President Joe Biden gets when anyone mentions inflation in his vicinity, it seems plausible that his administration has tacitly exerted political pressure on the Federal Reserve to delay rate rises as much as possible.
A booming economy is critical to the ability of Democrats to maintain control over both the House and Senate during the 2022 midterm elections. This is a game famously played by Nixon during the 1970s when he bullied Federal Reserve Chair Arthur Burns into recklessly lowering rates to boost his electoral hopes, contributing to the surge in inflation during the late 1970s.
Alternatively, given how widely disliked Trump and the Republican Party are in elite American circles, it is entirely plausible that Biden’s administration has exerted zero pressure and relied on the Federal Reserve and media to voluntarily compromise their credibility in a myopic attempt to help the Democrats.
Regardless, for the time being, the structural differences between the GCC economies and those of western countries suggest that inflation is likely to remain low and stable in the Gulf. Or, as Leo Tolstoy quipped in his novel Anna Karenina: “Everything intelligent is so boring.”