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Middle East inflation soars

  • Story Highlights
  • The Gulf states are seeing inflation as a result of the weak dollar
  • Many of the Middle Eastern nations' currencies have pegs on the greenback
  • Options to counter inflation include revaluation and subsidies on staples
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By CNN's Peter Sorel-Cameron
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LONDON, England (CNN) -- As everyone keeps a close eye on the shifting state of the global money markets, inflation is an issue that continues to rear its head -- and the Middle East is a region that is seeing more than its fair share of it.

Some Gulf nations' pegs to the U.S. dollar are big factors in growing inflation.

Many of the Gulf nations' currencies have pegs to the U.S. dollar, which in the past has been helpful, but in its current, shaky state, the close ties between currencies is proving to be more of a hindrance than a benefit.

Record lows for the dollar are pushing up commodity prices in the U.S., which in turn are affecting prices throughout the globe.

According to Daniel Hanna, visiting fellow at of the Royal Institute of International Affairs at Chatham House, the combined total cost of imports to the Gulf Cooperation Council in 2003 was $150 billion; in 2007 it hit $370 billion -- more than doubling the cost of living.

"It's a global problem," Hanna told CNN. "If you go onto the high streets in the U.S., the UK and even Asia, the rise of commodity prices ... means that we are seeing an impact on food prices across the whole world."

Combined with this, the rapid growth of Gulf states like Qatar is putting pressure on the infrastructure of the region -- and adding to financial worries.

"It's a cost of success, if you like; it's certainly a great thing that the economy is growing so fast," continued Hanna. "But to expect someone in five years to go from a very small economy, facilities and network, to go into a very medium-sized economy overnight is very unlikely."

But what can be done to counter spiraling inflation? In the U.S. and Europe, organizations like the Federal Reserve, the Bank of England and the European Central Bank have tools in place to act against currency shifts, but these have been missing in similar bodies in the Middle East.

One option is revaluation, but that can be a slippery slope, as Hanna explained: "If you revalue once, of course, the inevitable speculation will be, 'okay you're going to revalue again then,' and that could actually cause even more problems as speculators look to move money in to take advantage of further revaluations."

Making a bold step such as revaluing will encourage speculators to move money into the country to take advantage of further revaluations, and so weaken the stability of the economies there.

"The historic response, if you like, is has always been to look to subsidize, to insulate the impact of the fluctuations of exchange rates and commodity prices by looking to subsidize ... things like bread," Hanna told CNN. "The problem is you may be storing up problems for the future."

The final deciding factor for the future of the region's economies seems to be, as is often the case in the Gulf, bound up with oil prices.

Subsidies for staples depend on governments having enough money in reserve to cover the costs. If there is any drop in oil prices the prices of commodities will shoot up as the excess capital runs dry and state subsidies are cut.

Fortunately, at the moment there seems to be little likelihood of oil prices dropping, as predictions close in on $150 per barrel, but with the unstable condition of the global economies there is no real way of knowing what is in store for the region. E-mail to a friend E-mail to a friend

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