The drastic monetary and fiscal policy measures taken by central banks and finance ministers in response to the global financial crisis have in many quarters kindled fears of possible inflationary consequences. In the current issue of Global Investor, Credit Suisse analysts reach the conclusion that for most industrialized nations these types of risks remain moderate for now. In the emerging markets, on the other hand, the inflation risks are growing. Although the countries in question are on a considerably more robust growth footing, they eased their economic policy in unison with the countries worst affected by the crisis and are only gradually tightening again. Over the last year, the GCC moved from having some of the highest inflation rates worldwide to undergoing a sharp fall in consumer prices. Similar to other emerging markets, inflation risks in the GCC are now rising again, the report said. Credit Suisse forecast that inflationary pressures will grow across the GCC. This is based on their assumption that commodities, both softs and energy, will continue to rise, and their forecast that the dollar will weaken. It said should the dollar hold up, inflation risks will be lower. Moreover, while the economic outlook remains positive for the overall region, the gradual recovery will most likely limit domestically driven inflation pressures. Average inflation in the GCC is estimated at 2 percent YoY in 2009, after 11 percent YoY in 2008. While the trend has been similar, price movements have not been uniform in the GCC. The strongest change in inflation was observed in Qatar while inflation remained fairly low and steady in Bahrain. In 2008, the surge in commodity prices was both a source of strength but also of increased vulnerability in the GCC economies. The rise in food prices put upward pressure on inflation - food & rent subcomponents represent around 50 percent of various CPI baskets. Higher energy prices lead to a windfall in oil revenues, supporting strong economic growth and liquidity. Considerable rise in liquidity boosted credit expansion and a spending boom, which lead to supply side bottlenecks, especially in real estate. The fact that the local currencies are tied to the US dollar, with the exception of the Kuwaiti dinar which is pegged to a basket of currencies, was an additional reason for the swings in inflation. Prior to the financial crisis, the weakness of the dollar generated additional inflation pressure via import prices. In contrast, the surge of the dollar during the financial crisis deepened the decline in inflation. Finally, the sharp decline in housing prices in some parts also contributed to an easing of inflationary pressures. While fiscal policies in 2009 remained expansionary to support growth in the region, the weakness of commodity prices, lower liquidity and tighter credit conditions had a greater impact.
