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Dubai: Oman's decision to raise wages for government employees by as much as 43 per cent will stoke inflation in the country, said Standard Chartered Plc.
"Inflation is created when too much money chases too few goods, and raising salaries will exacerbate that problem in Oman," Marios Maratheftis, head of research for Standard Chartered in the Middle East, said on Sunday.
Gulf countries, including Saudi Arabia and the United Arab Emirates, are raising salaries and increasing subsidies in response to record inflation.
Such actions may create an "inflationary spiral" threatening their credit ratings, Moody's Investors Service said on January 29.
Oman has boosted salaries by as much as 43 per cent, increased social security payments and subsidised the cost of basic foods, Oman Daily Observer reported on Sunday.
Inflation in the country accelerated to a record 7.6 per cent in November as the cost of rents and food increased.
Elsewhere in the Gulf
In Saudi Arabia, consumer prices rose an annual 6.5 per cent in December, also a record, while in the UAE inflation climbed to 9.8 per cent in 2007, up from 9.3 per cent in 2006, according to a Bloomberg survey of economists.
The UAE lifted the salaries of federal government employees by 70 per cent this month, while Saudi Arabia introduced a 5 per cent increase and a 15 per cent raise is being considered in Kuwait.
Saudi Arabia's wage increase will have little impact on consumer prices, because it's lower than the rate of inflation, Saudi British Bank said on February 7.
"What also concerns me is inflation expectations," said Maratheftis. "These demands for higher wages are signs that people expect inflation to remain high. These expectations are usually self-fulfilling."
Gulf inflation has been caused by a combination of pricier imports from Europe as the dollar weakened, and increased public and private spending on higher oil prices.
Kuwait dropped its currency's peg to the dollar in May last year in a bid to tackle imported inflation. Qatar is considering whether to revalue its currency to deal with inflation of nearly 14 per cent, while the UAE has ruled out dropping its peg this year.
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