It’s a well-known fact in everyday life that raising the cost of something tends to weaken the call for it, at least among ordinary goods and services.
As for general inflation, that can be viewed as either a regrettable symptom of overheating (as was once the normal interpretation), or a desirable characteristic of business momentum, prompting consumers to bring purchases forward, helping to alleviate chronic overindebtedness by perpetually spinning the flywheel of growth.
For most people the idea that rising prices are beneficial conflicts somewhat with the effectiveness of their pay packets, and their desire for lifetime saving. Yet, for many economists it is increasingly taken as read that a certain amount of inflation, officially targeted as such, actually oils the economic machine.
Global commentaries these days even identify low inflation as a problem, one to be solved by yet further monetary and/or fiscal stimulus. While you would be forgiven for thinking that that particular stratagem had been tried already to destruction, there are even voices seeking higher inflation rates to be institutionalised, as if some kind of panacea.
This form of reasoning is directed particularly at Europe, which is fast becoming the bugbear of the international economy. Oil prices and Gulf export receipts have felt the effects of the bloc’s drag on activity. Leaving the burgeoning US economy aside, Japan too is beset with a persistent, indeed ingrained inertia, while China remains a mystery, struggling with so-called shadow banking, though thought to be muddling through.
Right now, fractured stock market sentiment stands testament to a breakdown in the fundamentals both of economic progress and economic policy.
Observers supportive of the Eurozone suggest that the European Central Bank should take extraordinary, expansionist measures, along the lines of the quantitative easing pursued so fervently in the US and UK. Media noise hounds Germany, at the eurozone’s core, for not bowing to such a reflation agenda to meet the needs of the peripheral states. Good luck with that, as they say.
Meanwhile, the other potential escape route for those countries suffering austerity, namely dismantling the euro itself, is hardly ever mentioned, despite the currency’s central role in creating these unfortunate circumstances. It would certainly be a messy business, if tried.
Without such brave thinking, we are left with a certain desperation that Europe’s woes might be cured if only inflation could be sponsored. Indeed, it is upon this curious notion — that faster inflation would promote faster growth — that euro depreciation is sought, as if raising the cost of living (by way of imports) is going to encourage households to loosen rather than tighten their belts. That contorted logic is already seen to be failing in Japan under its Abenomics programme.
The debate has undertaken some kind of circular orbit in this regard. Where once inflation was a price to be paid in the aftermath of growth, now it’s perceived in the mainstream as a forerunner of growth. That’s in the West, anyway, where economic precepts have long been keenly contested.
What about in the Gulf? Is inflation perceived as helpful to the point of being a precondition of growth, or merely an adjunct, an accompaniment that stimulates protective and speculative investment such as in real estate, driving activity for some while at least?
Farouk Soussa, Middle East chief economist at Citi, sees a distinction between short- and long-term outlooks, while noting that research shows the link between inflation and growth “is empirically negative”. For a while, inflation aids consumption by eroding debt. Beyond a certain interim, however, it reduces investment by undermining savings, with a damaging feedback loop.
But in the Gulf inflation “is not nearly as negative” as in ‘non-oil’ economies, he advises, with savings rates “abnormally high” and investment “driven by government”. “Also, competitiveness is not an issue when the vast majority of exports are dollar-priced, insensitive to domestic costs.” Moreover, the drivers of GCC inflation are different, focused on food and housing.
Mohammed Salisu, an independent regional analyst, sees another distinction, between rates of price growth. “Low and stable inflation is a key ingredient for economic growth and prosperity,” he maintains, “as it provides appropriate incentives to all economic agents to engage in meaningful economic transactions.” Yet, higher inflation harms purchasing power, and creates instability.
Also citing food and rent, he argues “households tend to bear the brunt of inflation in the GCC, [running] the risk of social pressure, and provoking government transfers and wage increases” in an intensifying cycle. The dollar peg can amplify the concern, potentially both inducing inflation and limiting the ability to curb it, he remarks.
That kind of dependence on global forces only makes what’s happening in the international arena of special concern. And if global policymakers do have their rationale back to front — so that we’re really getting nowhere, merely building even greater debt — then the outlook is truly ominous.
