For years I never understood inflation. Not even the definition nor the concept. All I knew was that the prices increased. Stuff got dearer. But why? No clue. How? No idea!
Then I moved to the Gulf last September. And this region has been experiencing a double digit inflation. So I was forced to take notice. What the hell is happening here? The cost of every damn commodity is sky rocketing. Two of the most talked about problems the region is currently facing are the rising cost of living and the depreciating value and purchasing power of the local currency, both of which are directly related to inflation. This made me think. Isn’t this the most natural phenomenon for any region known for its exponential growth? And also for it’s artificiality!
I think this is a direct result of being complacent. Anyone who knows two of the most commonly used words in macro economics will understand what I am talking about. ‘Demand’ and ‘Supply’. When there is excessive demand for a certain commodity, the prices will go up. When there is a monopolistic scenario where greedy traders control the market, the prices will go up. When there is no liaising within the UAE on fiscal policy, the prices will go up. The fact of the matter is that the country has bit more than it can chew. It is a vicious circle. With increasing multi-billion dollar real estate projects, millions will be required to populate the offices and residential units. This will in-turn increase demand exponentially for basic commodities like food, schools, hospitals, transportation and other factors that go into an individual’s monthly expenditure. Where there is demand, there is inflation. Inflation and development go hand in hand. To reduce inflation, demand has to come down. And, with the number of projects announced daily, this may not be far away.
Increasing interest rates will not help. It will only reduce liquidity in the market. People will not be able to buy those billion dollar properties. That will reduce the demand. And they can’t afford to do that. They need the money. It is a double edged sword. In all cases, they need to sustain high demands. But inflation hits all commodities. Even the industry that started it all – Real Estate. Thus higher costs will also affect the developers. Several will go bust, leaving incomplete projects, and in some cases, projects not even started with desperate investors in the lurch. What next? Chaos. Damaged reputation. Demand falls. In the meantime, with the US economy under recession, what happens if the dollar peg breaks? The value of the local currency increases that will paralyze the non-oil economy as it will drive exports down and make it more expensive to sell property. Demand falls further. What next? Oil prices? US-Iran crisis? I don’t want to think any further.
For now, I am happy to buy a tin of Nido for Dh 74, which was Dh 30 a couple of years back, and pray……that my employer increases my salary! 🙂