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There cannot be one, ready textbook response to tackle inflation, which has reached unbearable levels in the Gulf Co-operation Council countries.
But there is general agreement that inflation, the continuous increase in the general price level, is bad for the economy and for the general public.
How do we stop inflation? One approach would be to freeze all prices. Many countries have attempted this over a long period of time.
For example, in the year 301 AD, the Roman emperor Diocletian froze all prices and wages and made the infringement of this edict punishable by death. In spite of some executions, inflation was not contained.
Eventually this law against price and wage increases was repealed. Later attempts at directly controlling price increases also failed because all these controls addressed the symptoms, but not the cause.
So what are the real triggers that stoke inflation in the Gulf Co-operation Council countries?
Mainstream economists believe that high rates of inflation are caused by high rates of growth of the money supply.
Views on the factors that determine moderate rates of inflation are more varied: changes in inflation are sometimes attributed to fluctuations in real demand for goods and services or in available supplies, and sometimes to changes in the supply or demand for money.
In the mid-twentieth century, two camps disagreed strongly on the main causes of inflation at moderate rates: the "monetarists" argued that money supply dominated all other factors in determining inflation, while "Keynesians" argued that real demand was often more important than changes in the money supply.
Exogenous factors such as high global commodity prices combined with the predominance of currency pegs to the weakening US dollar and the abundance of oil-related liquidity in the region have been picked as the root causes for inflation in the GCC.
Added to this, credit growth and rapid population growth have caused domestic demand to soar creating problems with supply, particularly in the real estate sector.
There was already a shortage of housing that was pushing up the price or rental cost of housing, even before the recent rise in the global price of building materials (and shortages of supply) and rising wage pressure in the construction sector.
What is the remedy now?
There are certain measures on the monetary side that governments can and have been doing to stop inflation from running out of control, says Henry T Azzam, CEO of Deutsche Bank, Middle East and North Africa.
These include higher required reserve ratio to force banks to lend less, regular issuance of bonds, sukuk and CDs by governments of the region to help soak up excess liquidity, and widening the gap between lending rates and deposit rates.
Other measures include putting a cap on annual rent increases, allowing for compensatory wage increases to be in line with official inflation rates, providing food subsidies and low-cost housing for the poor, and extending the mortgage duration from the existing average of 10 years to 25 or 30 years as is the case in several other markets. The increase in the duration will result in less monthly debt burdens and less rent.
Albeit, higher prices will continue to be the inevitable consequence of strong government expenditures backed by rising oil revenues and exacerbated by excessive growth in domestic liquidity.
Inflation is the price that businesses and consumers will have to pay while enjoying unprecedented boom economic conditions.
Counter cyclical fiscal policy is more effective to dampen inflationary pressures in the region than monetary or exchange rate polices. Not much could be done to deal with inflation caused by supply bottlenecks, we need to "wait it out " until more supply comes to the market.
Another possible tool is a break with the currency pegs. The pegs in the GCC are longstanding and have helped maintain macroeconomic stability and attract investment.
It can be argued that as the GCC economies modernise and become more dynamic, the currency pegs seem outdated, but what seems clear, is that the regional central banks are not going to be bullied by commercial and financial sector interests to alter a regime that has served them well in the past.
However experts maintain that the only effective way to contain inflation in the long run is therefore to restrict the growth in the money supply.
The likely rate of increase in the quantity of goods and services which can be maintained without inflationary pressures is usually related to more labour, entrepreneurship and capital goods, and better skills, management and technology.
Growth in the money supply should accordingly be linked to sustainable growth in production. Preventing excessive money supply growth is therefore a crucial element in combating inflation.
