Some people think that a little inflation is all the economy needs to break out of the doldrums. However, what they don’t realize is that you can’t have “just a little inflation” any more than you can remain a just a little greedy.
- September’s Dubai inflation highest since 2009
- Rise in cost of living in Dubai driven by silent inflation
It may take a while, but once inflation takes hold, it rarely stands still. This is because once a rate of inflation is factored into consumers’ prices, it soon moves up to a higher pace as both workers and business try to beat it.
People react by rushing to buy before prices go up. Such behaviour is contentious and it may apply also to buying homes when mortgages are still cheap, while the price of homes doubled during the past one and half year in Dubai. For their part, businesses will be quick to take advantage of a greater willingness to accept higher prices by hiking their own price tags in order to maintain profits, if not increase them. And rents go higher and higher, posting double digit increases only in the month ahead of World Expo 2020 announcement scheduled for the end of November. Consumer prices in Dubai are not far behind, with some basic groceries becoming more expensive by 15% to 50% during the past four months.
Indeed, in its early stages, all the major economic players — consumers, businesses and the stock market (which already advanced over 70% since the beginning of the year) — are only too happy when inflation starts to pick up. They all imagine they are making big money.
Consumers tend to associate higher prices with higher wages. From past experience, they know that they can garner a bigger wage hike in an inflationary environment than one in which prices are stable. This will allow them to repay their debts more easily they think, if interest rates remain so low.
- Read more: Cheap lending triggers property bubbles
Businesses often rely on inflation to boost their bottom lines. Higher prices swell their income statements and boost profit margins without a commensurate rise in the actual volume of goods or services sold. Public listed companies and some who plan to be become public soon announce higher revenues. Needless to say, what is good for the economy is good for stocks. Again, it is a question of higher prices boosting earnings, thus justifying higher stock prices, and so on.
Given a choice between inflation and deflation, economists would clearly prefer inflation. Rising prices grease the wheels of commerce and industry, and still there is an option to cool things off if inflation gets out of hand by raising interest rates and reducing the money supply. At present, local banks are more than willing to lend to almost anyone.
Falling prices cause people to wait before buying, leaving businesses with piles of unsold goods, which can be liquidated only by trimming production and firing workers. As people lose their jobs, they are even less apt to spend.
Therefore, inflation is much needed. For one thing, inflation boosts also fee revenues faster than spending and this is important when it comes to public services.
Past experience shows that rising inflation is not always the panacea for growth it’s made out to be. In 2008, before the economic downturn, inflation in Dubai reached double digit numbers.
