Taming the illogical price spiral in the Gulf

When oil prices started to rise in 2003, a state of chaos prevailed over countries of the region concerning the prices of many commodities and services, especially basic commodities such as food.

As soon as oil prices started to rise, all price indexes took a frightening hike, which forced companies to increase wages. Inflation rates continued to increase and reached record levels, which widened the gap between high prices and living standards and made this gap reach a peak by the second half of 2008.

The sharp and rapid decline in oil prices and fall in demand, which resulted from the global financial crisis, made many breathe a sigh of relief and feel that the phenomenon is coming to an end, especially after commodity prices started to fall sharply in international markets.

Unfortunately, this was not felt in the Gulf region, where prices maintained their levels prior to the crisis, despite the 40 per cent fall in fuel prices, which were one of the main reasons behind high inflation rates in the first place.

Logically, inflation rates in any country are proportionate to the general economic conditions in that country, thus we can assume that when prices in the country of origin and fuel prices drop, sale prices must also fall, but this logic seems reversed right now.

Currently, prices are not only illogical, but also go against market rules. The principle of supply and demand seems to be also inapplicable, until further notice.

Despite the efforts of some authorities and consumer protection societies in all countries of the region, there are no positive outcomes to curb the prices that continued to increase, even after the warehouses of importers became overfilled with various commodities. Yet, this price hike was not limited to imported goods. It also reached the prices of locally made commodities and daily services, such as drycleaners, who raised the price of pressing a dishdash (kandoora) from Dh1 to Dh2, and then to Dh4 in a short time.

Shopowners were only too happy to increase prices threefold in a short time.

Similarly, the price of local Gulf bread jumped from Dh0.25 to Dh1 within the same period, although Lebanese bread, which is heavier and uses more raw materials, returned to its price prior to the latest increase.

Most prices of commodities and services appear to go only in one direction, which is up, regardless of any local or foreign developments.

Wheat and rice prices declined by 35 to 40 per cent in international markets since the start of the economic crisis. Yet, this decline was not reflected in local markets.

It is important to tackle the price spiral before it gets out of control, especially when the countries of the region are keen on curbing inflation. These efforts have indeed resulted in reducing the prices of some commodities.

In fact, the authorities have taken many decisions to tackle price rises, but it is the implementation that is at fault.

This results in having significantly varying prices for the same commodity in two neighbouring outlets.

Needless to say, such a variation in prices does not cause damage to the consumers alone, but also harms the region's markets and reduces their competitiveness.

Moreover, competition in the global markets has become fiercer in view of the financial downturn, as prices of commodities and services have declined remarkably.

Another relevant point is that most profits from the unjustifiable hikes find their way out of the country due to the dominance of foreign traders over the retail sector. This requires the authorities concerned to tackle price violations.

The writer is a UAE economic expert.