Imported inflation will be the biggest threat in stoking higher inflation . The dollar’s recent gains should offset some of that. Image Credit: Shutterstock

Dubai: Global inflationary spikes are getting closer to the UAE consumers than they might think.

Although the forecasts for inflation in the UAE this year doesn’t look as alarming as for a number of developed and emerging economies, there are clear indications of price increase across the board.

While inflation is forecast at 2.4 per cent this year from 0.2 per cent in 2021, the UAE Central Bank warned that the country is not insulated from a global inflation surge. “Soaring global inflation is a concern for open economies such as the UAE, where imported inflation would ultimately pass-through to domestic prices and feed into headline inflation,” it said in its latest economic review.

Drivers of inflation

While the extraordinarily easy fiscal and monetary policies adopted by governments and central banks to support growth during the pandemic is manifesting in rising prices, supply bottlenecks, gaps in production too have added to the global price surge. The war in Ukraine is exacerbating already high food and fuel prices. Analysts expect food and energy prices will soon get reflected in the overall consumer prices in the GCC.

According to Monica Malik, Chief Economist, Abu Dhabi Commercial Bank, “The rise in transport costs is largely due to the higher fuel price, reflecting the sharp rise in the oil price, though other factors are also contributing.”

Price pass-through

Latest UAE Purchasing Managers’ Index (PMI) data show a sharp rise in input costs are driving UAE’s non-oil private sector to pass on the higher costs to consumers.

The pass-through of fuel prices in the UAE to other consumer items is relatively higher than GCC peers as the country does not have a fuel price cap.

“We expect the higher global inflation to also filter in via imports, whilst higher rental costs are also being reflected in the consumer price inflation (CPI),” said Malik.

Pre-emptive strike

As economies grapple with rising prices, the oil-rich GCC countries are in a better position to deal with the rising prices. Analysts say these countries have the option to subsidise and or introduce price controls on key components of consumer basket.

Economists say the risk of wrongly accepting the low-inflation hypothesis and doing too little to prevent the threat can prove costly. “Well-calibrated pre-emptive strikes are often desirable when managing inflation,” said Hippolyte Fofack, Chief Economist at the African Export-Import Bank.

Clearly, the UAE has opted for pre-emptive measures. The UAE’s Ministry of Economy recently approved a new policy regarding the pricing mechanism for basic consumer goods in the country. Under the new policy more than 11,000 commodities including fresh and dry milk, fresh chicken and eggs and bread will need to seek prior approval to increase prices.

Business confidence

Latest PMI data shows the risk of ongoing inflationary pressures underlined a drop in business confidence to a four-month low, leading to stockpiling of inputs and reducing labour costs where possible.

The rising funding costs for businesses as a result of higher interest rates will add another dimension to the rising costs of doing business. While many oil importing economies are facing the prospect of severe inflation and prolonged stagflation, the GCC is likely to witness a moderate to sharp rise in prices.

Currency strength

While a strong currency erodes competitiveness, it can be useful in keeping inflationary pressures at bay to some extent. The rising exchange rate of dollar and the corresponding rise in the real effective exchange rate of the dirham makes imports cheaper. In other words the higher purchasing power of dirham against the currencies of its trading partners, especially import destinations will make import cheaper.

“The stronger currency will have some impact, though will not fully counterbalance the sharp rise in global prices,” said Malik.