According to Mercer’s 2019 Cost of Living Report, Dubai is one of the most expensive cities in UAE, and the circumstances are no different in 2022. While even the slightest rise in price can wreak havoc on the finances, imagine what the skyrocketing prices of inflation can do.
What is inflation? Let’s take an example to understand the concept.
About 10 years ago, the price of two cups of coffee in Dubai was AED 3-5. However, today you might get only one cup of coffee for the price. As the purchasing potential of your currency gets weaker, you get to increase your spending more than earlier.
Inflation is defined as the relentless decline in the value of money and the decline results in a substantial increase in the prices of goods and services.
Probable causes and effects of Inflation
Typically, an increase in the supply of money is one of the root causes of inflation. However, there are other reasons such as demand-pull, cost-push effect, and built-in inflation. The demand-pull inflation occurs when demand for products and services exceeds production capacity. The cost-push effect happens when the production costs increase prices whereas the built-in inflation occurs when the prices rise, raising the wages to maintain the living costs.
While a small but positive inflation rate is economically useful, high inflation rates in Dubai tend to feed on the economy while impairing an economy’s long-term performance. Inflation’s most pervasive and primary effect is that it erodes the purchasing power of customers.
During the inflation period, low-income consumers spend a higher proportion of their income on necessities than those with higher incomes. So, the poor have less of a cushion against the inherently rising costs during inflation. The abhorrent economic period raises interest rates, hurts bonds and growth stocks, and causes painful recessions by constraining the money supply.
How is the Dubai Government dealing with inflation?
The cost of living in Dubai is exponentially increasing with the rising inflation rates. There is a sharp decline in the purchasing power of money, and the residents have to pay more to thrive in a demanding city like Dubai. What is the Dubai government doing to deal with inflation? Let’s see!
- The Dubai government has disbursed inflation allowances of 47,300 to low-income families to help them survive the increasing prices of necessities like food, water, electricity, and fuel.
- The “trilemma” monetary policy of free capital flows, independent interest rates, and fixed exchange rates is followed.
- The government has resorted to the cruder method of price control where the prices for certain asset class remains low.
- Fuel subsidy is provided (monthly subsidy of 85% of the fuel price increase) for 300 liters for the head of the family and 200 liters for the working wife.
In Arab countries, inflation rates are expected to rise approximately 7.5 percent by the end of 2022. Consumer prices in Dubai are significantly increasing faster than in Europe or Singapore, capping a sharp reversal after about 3 straight years of deep deflation. The oil-rich Gulf region is no longer immune to cost pressures plaguing much of the global economy. However, the government and the citizens are trying their level best to combat inflation and as an emerging country in the face of the world, Dubai can do it skillfully with limited resources.