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Dubai: Currency reforms are the key to fighting food prices in the UAE and other Gulf states where inflation is in double-digit territory and the rising cost of food imports is adding to imported inflation, according to economists. "The rise in food prices is part of a global trend which has seen food price inflation over the last few years. The UAE is a net importer of food given its arid climate. It is a case of imported inflation; a problem that could be remedied through foreign exchange reform," said Marios Maratheftis, regional head of research, and Mary Nicola, an economist, at Standard Chartered Bank.
In the past, policymakers in the region often referred to inflation as core inflation that excludes food and energy prices. However, economists said it is time to keep tabs on headline inflation numbers. "During a period when food and energy prices have become a major force driving worldwide inflation, the wedge between core and headline inflation became too large to ignore, especially for households that have seen their cost of living rise quickly," said Marcela Meirelles, an economist with Societe Generale Asset Management. Basic food prices in the UAE are up 36 per cent from last year. Prices of basic food items such as cooking oil surged 80 per cent, basmati rice, 50 per cent, sugar, 31 per cent and egg 19 per cent. The prices to a large extent have been impacted by the increased cost of imports owing to the decline in the purchasing power of the dirham due to its peg to the dollar. According to economists, Gulf economies, which are posting robust growth, face a high risk of commodity price inflation contaminating core prices.
As the labour markets here are relatively supply-inelastic, workers are better positioned to demand higher nominal wages to compensate for the higher cost of energy and food. In the recent months, most Gulf governments and private sector employers announced salary rises. The key drivers of core inflation in the UAE have been housing shortage and excessive money supply. According to the latest figures from the central bank, consumer loans surged 40 per cent in 2007 while the money supply grew 33.8 per cent year on year at the end of September 2007. While housing shortage can be remedied once more supply hits the markets, inflation arising out of money supply requires monetary policy tools that will drain excess liquidity in the system. Yardsticks: Defining the spiral - Headline inflation refers to the rate of change in the consumer price index, a measure of the average price of a standard basket of goods and services consumed by a typical family.
- Core inflation measures the change in average consumer prices excluding certain items in the CPI with volatile price movements. Core inflation is often calculated by excluding certain items from the index, usually energy and food products.
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