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There is a diversity of opinion about what stokes inflation in the GCC countries.
While the Institute of International Finance (IIF) blames the peg to the tumbling dollar as the root cause of sustained inflation, Bahrain's central bank governor Rasheed Al Maraj contends there is not sufficient proof that the fall of the value of the dollar contributed to the rise of consumer prices in the kingdom and inflationary pressure in the Gulf.
Mr Al Maraj's comments contrast with the common perception that inflation in the Gulf is being driven by the rising cost of imports caused by the weak dollar to which all the GCC states, except Kuwait, have their currencies pegged.
Higher government spending and more bank lending are driving domestic inflation, rather than more expensive imports through a weaker dollar peg, Bahrain's central bank governor maintains.
Most of the pressure was from local issues tied to an increase in government spending, together with an increase in market liquidity and hence an increase in loans, he notes.
The Washington-based IIF, which represents the world's large banks, however warns that average annual inflation in the GCC is likely to climb to seven per cent in 2008 if exchange rate regimes of the member countries are not reconfigured.
IIF says inflation is climbing in most GCC countries and is most pronounced in Qatar and the UAE, where consumer price increases are in excess of 10 per cent.
Average consumer price inflation in the GCC reached a 15-year high of 5.3 per cent in 2006, and could have risen to 6.7 per cent in 2007.
IIF, the largest lobby for 375 of the world's major banks and investment institutions, however, says it did not expect a "wholesale abandonment" of dollar pegs.
The dollar peg has long served the countries well, contributing to macroeconomic stability and facilitating GCC convergence toward monetary union.
However, if the dollar depreciates further beyond market expectations and if in the face of a slowdown, US monetary policies continue to ease, underlying pressures could eventually test the durability of the dollar peg.
Meanwhile, according to the International Monetary Fund (IMF), Bahraini inflation is expected to be 2.9 per cent in 2007, but other Gulf states are experiencing much higher rises in the cost of living, which is putting increasing pressure on central banks to either revalue their currencies against the dollar or drop their pegs altogether.
Annual inflation in Saudi Arabia accelerated in September to 4.8 per cent, the highest level in at least a decade, inflation accelerated to almost 14 per cent in Qatar at the end of the third quarter, while inflation stood at seven per cent in Oman and 6.2 per cent in Kuwait in September. In the UAE inflation hit 9.3 per cent last year.
Bahrain has time and again asserted that it had no plans to change its monetary policy.
The country does not see any reason at the moment to change its currency policy in regard to the US dollar as it did not perceive any negativity from the dollar despite its change in value in past years.
Bahrain's stance echoes those of other Gulf central bank governors, who have all backed the falling dollar and claimed there is no planned shift in policy.
However, their remarks have done little stop speculators driving GCC currencies up to record highs on bets that revaluations or removal of dollar pegs are imminent.
Policies and rhetoric apart, what matters most now is that there is no divergence of views that inflation is rising.
The common man is looking to what steps the GCC governments are going to take to mitigate their worries about rising rents and the price spiral.
True government spending cannot be done away with to keep inflation low. At the same time there needs to be measures such as a cap on rents and a price monitoring system to ensure that inflation is kept within bounds.
Another aspect the GCC governments need to look into is the tremendous loss being suffered by the large expatriate population because of the erosion in value of the local dollar-pegged currencies.
