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The variables affecting inflation in selected countries
Inflation is a critical measure of a countries economy because it reflects the living standards enjoyed by the citizens. Economies typically experience booms and bursts that influence the demand and supply of goods and services, and in turn, their prices. In this regard, inflation is considered the changes in the prices of goods and services in a country, often determined annually. It can be positive if the prices increase, with dramatically high increases being termed as hyperinflation, and negative if the prices reduce, leading to deflation. The United Arab Emirates has a thriving economy that is highly dependent on oil and gas (Nusair 998). Its citizens enjoy a relatively high standard of living comparable to that of industrialized nations in the west. However, the country has experienced economic shocks from the fluctuation of oil prices, the slump in the real estate market, and public health crises, like the ongoing Covid-19 pandemic, which has caused inflation (Arabian Business para 2). Nonetheless, United Arab Emirates (UAE) is diversifying its economy to reduce its reliance on it, thus protecting it from oil-related economic shocks (Nusair 998). It is also emiratizing its workforce to increase the participation of the Emiratis in an expatriate-dominated labor market. Consequently, the country experienced a deflation of about 3% in 2021, up from 2% deflation the previous year (O’Neill para 1). The ensuing study dwells on the variables and influence inflation in the United Arab Emirates as a member country of the Gulf Cooperation Council (GCC).
Problem Statement
Inflation bedevils the economies of many countries. Emerging economics are particularly vulnerable to inflationary pressures caused by rapidly changing economic environment globally, which exerts unprecedented pressures onto domestic economies. Besides, the monetary regime in emerging economies is often immature and not resilient enough to absorb internal and external pressures. In turn, emerging economies often experience high inflation.
The United Arab Emirates is an emerging economy in the Middle East, which is developing rapidly. Its economy is growing amidst ongoing rapidly changing business environment worldwide. The management of the UAE economy is grappling with the best way of making the economy resilient against internal and international shocks. However, since inflation is a quantitative measure of the health of a country’s economy, there is need for the UAE government and economists to discern the variables that affect inflation in the country.
Purpose of Study
The purpose of this study is to determine the variables that affect the inflation in selected countries, with a focus on the United Arab Emirates. The United Arab Emirates was selected for being one of the most economically progressive countries in the Gulf Cooperation Council membership. The GCC countries have experienced rapid economic development since the discovery of oil in the early 1900s. Nonetheless, the global business environment has experienced devastating economic shocks recently, including the ongoing covid-19 pandemic, which has disrupted global supply chains and created shortages of natural and manufactured products. In turn, countries, such as the United Arab Emirates, which rely heavily on imports using earnings generated from the exportation of oil and gas products, have experienced elevated inflation due to the recent global economic occurrences. Therefore, it is critical to determine which variables influence inflation in UAE to help formulate effective monetary policies to withstand the harsh global economic conditions.
Research Question
The research question guiding this study is ‘what are the variables affecting inflation in the United Arab Emirates?’.
Hypotheses
This study will focus on the following seven hypotheses to help discern the influence of variables on inflation in a country.
Ho1: The global oil prices have no significant influence on the inflation in the United Arab Emirates.
Ho2: The appreciation or depreciation of the United States dollar has no significant influence on the inflation in the United Arab Emirates.
Ho3: The global food prices have no significant influence on the inflation in the United Arab Emirates.
Ho4: The wages and salaries have no significant influence on the inflation in the United Arab Emirates.
Ho5: The cost of housing and real estate has no significant influence on the inflation in the United Arab Emirates.
Ho6: The cost of transportation and logistics has no significant influence on the inflation in the United Arab Emirates.
Ho7: The level of government expenditure has no significant influence on the inflation in the United Arab Emirates.
Definitions and Summary
Definitions
Several terminologies and concepts used in this study require to be defined to enhance the understanding of their use.
Gulf Cooperation Council: the economic and political group of Arab nations in the Middle East bordering the Persian Gulf. It comprises six nations, including Bahrain, Kuwait, Qatar, Saudi Arabia, Oman, and the United Arab Emirates. The countries focus on establishing highly developed and interconnected infrastructure, and maritime and air connectivity.
Inflation: the loss of purchasing power to a currency due to price increase. It si commonly measured using the consumer price index (CPI).
Monetary policy: it a financial management regime that controls the quantity of money in an economy. It outlines the channels through which money is supplied to an economy.
Summary
Several variables contribute to the inflation of a country, which is reflected in the prices of goods and services. These variables influence the purchasing power of a country’s currency and how that power has changed over time, in annual intervals. Central banks are mandated to determine these variables and institute measures that would regulate inflation to stabilize and lower its change rate. In this case, the Central Bank of the UAE (CBUAE) is mandated to monitor inflation in the country and institute monetary policies that would regulate and prevent the inflation rate from hitting double digits to stabilize the economy. For the United Arab Emirates, the gross national product (GDP) and money supply influence the inflation rates and trends significantly (Alsheikh and Rana 1309). The reason being that the UAE is highly dependent on oil-related exports to generate revenues to support its social programs, public investments, and sovereign savings (Nusair 999). Similarly, the UAE imports most of its products, and especially food, considering that it is located in the Arabian Desert, which is not arable (Javed et al. 213). Besides, its currency, the Dirham, is pegged against the United States dollar to help stabilize the monetary exchange rate. These economic features are common across the GCC member countries and, therefore, not unique to the UAE. From this precept, identifying the variables that affect inflation in the United Arab Emirates becomes feasible. These variables can be internal or external depending on whether the CBUAE has any significant influence on them and their effects on inflation using monetary policy interventions. Some of the variables that influence the United Arab emirates’ inflation include the global oil prices, the appreciation or depreciation of the United States dollar, the price of food globally, the wages and salaries, the cost of housing and real estate, transportation and logistics, and the level of government expenditure.
Conclusion
Works Cited
Abbas, Waheed. “What inflation? Cost of living set to decrease in UAE in 2019.” Khaleej Times. 11 March 2019. https://www.khaleejtimes.com/business/what-inflation-cost-of-living-set-to-decrease-in-uae-in-2019.
Abouraia, Mahmoud Kamal. “Determinants of high and continuous inflation rates in the United Arab Emirates: A managerial point of view.” Business Management and Strategy, vol. 7, no. 2, 2016, pp. 68-81.
Alsheikh, Duha, and Faisal Rana. “Determinants of inflation in GCC countries.” PalArch’s Journal of Archaeology of Egypt/Egyptology, vol. 18, no. 13, 2021, pp. 1309-1321.
Arabian Business. “2022 forecast: Why UAE companies should prepare for rising inflation.” 1 January 2022. https://www.arabianbusiness.com/industries/banking-finance/2022-forecast-why-uae-companies-should-prepare-for-rising-inflation.
Edarabia. “Population of the UAE (2021).” 2022. https://www.edarabia.com/population-uae/
Javed, Iqbal, Iftikhar Nabi, Mudassar Yasin, and Amar Razzaq. “Macro determinants of exports from Pakistan to United Arab Emirates (UAE): an empirical analysis.” Journal of Agricultural Research, vol. 56, no. 3, 2018, pp. 209-214.
Nusair, Salah A. “Oil price and inflation dynamics in the Gulf Cooperation Council countries.” Energy, vol. 181, 2019, pp. 997-1011.
O’Neill, Aaron. “Inflation rate in the United Arab Emirates 2026.” Statista. 23 November 2021. https://www.statista.com/statistics/297779/uae-inflation-rate/.