Balancing growth with inflation is the new catch-22, and the challenge is manifesting itself globally. There are as many measures as there are countries. The Chinese are perhaps most candid about it, ready to “live with” slightly lower GDP growth as long as inflation stays below 3.5 per cent. This approach suggests that counter-inflation measures can also be a matter of priority.
Inflation is defined as a process of continuously rising prices and falling purchasing power, and governments globally respond to it based on the leverages at their command. Four-decade high inflation in the United States has compelled Americans to consider it the nation’s top problem. The Euro Area’s annual inflation rate also registered a record high of 8.6 per cent in June 2022, compared to 8.1 per cent in May and 1.9 percent a year earlier. Alongside the quest for a new government, Britain is bracing for a long haul as high energy prices have pushed inflation toward 13 percent.
According to Pew Research, in the last two years, inflation rates have doubled in 37 of 44 advanced economies, with Turkey registering the highest inflation rate in the first quarter of 2022, at 54.8 per cent. In the first quarter of this year, Greece’s annual inflation rate reached almost 21 times the level two years earlier (0.36 per cent).
A stern inflation test also stares the developing world in the face. Hovering around 5.6 percent between 2001–2010 and 4.8 per cent between 2011–2020, the developing world’s inflation has surged to 6.3 per cent in 2021 and is projected to rise even further this year. In June, India’s retail inflation was registered above 7 per cent for three successive months, exceeding its Reserve Bank’s 2-6 per cent tolerance level for the sixth month.
Considering the energy price levels and global supply chain concerns, the prospect of a sustained and not a temporary bout of inflation is here to stay. One forecast suggests global inflation will rise to 7.5 per cent by the end of 2022.
Thankfully, things have been relatively calm in some, if not all, of the Middle East. In the GCC, inflation hovered around an average of 3.2 per cent this year, up from a projected 2.8 per cent six months ago. The Institute of Chartered Accountants in England and Wales (ICAEW) projects GCC inflation to average 3.1 per cent this year, from the 2.7 per cent forecast three months ago. It is expected to increase from 2.3 percent in 2021 to 2.5 percent in 2023.
Inflation has considerably dampened consumer demand in the region, and businesses are starting to pass the cost to consumers. Economic Intelligence Unit expects the MENA region’s consumer price inflation to remain elevated in 2021‑22 at an annual average of 14 percent. As per the EIU assessment, the global economy’s lingering supply-chain issues and post-pandemic demand recovery in the Middle East will stoke inflation.
Two factors put the Middle East situation vis-à-vis inflation in context. While oil production leads to cash surplus, leading to positive signs in local markets, large imports (especially food) make inflation an inescapable reality for the region. Moreover, the currency pegs to the US dollar, essentially import inflation.
Vanessa Heywood, the ICAEW Middle East head, calls the region’s situation “an interesting dilemma.” According to her, geopolitical turmoil has brought the GCC nations to the international negotiating table to aid global oil supply challenges. “But hiking up oil production counteracts the region’s long-term strategy of diversification,” she says. This is a catch-22 of its own kind for the region.
Routine measures usually follow inflationary trends across the globe. However, some GCC governments have spent massively to shield their citizens from rising prices. The financial support extended in the UAE and Saudi Arabia alone amounts to US$ 7.6 billion and US$ 5.33 billion, respectively.
These funds are primarily invested in direct cash transfers to the needy and stockpiling essential commodities. Such measures go a long way in curtailing the impact of inflationary pressure in the GCC. This is the first prolonged spell of hardships for the region since the deregulation of oil prices. Moreover, VAT has been introduced, and subsidy bills have been rationalized with an eye on broader liberalization.
One of inflation’s direct impacts in the region is rising commodity prices. The phenomenon automatically becomes relevant to our region as food prices account for over half of the increase in headline inflation. It was almost 60 per cent across MENA last year. Since ignoring it is not an option, it is good to see firm steps to alleviate the situation.
Cash injections also point towards the welfare dimension of counter-inflationary measures. Even if oil windfalls do not repeat themselves regularly, the region can at least employ a buffer to bail its people out battling inflationary pressures. Despite living in an inter-connected world, this buffer separates us from the rest of the world.
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