Anyone who was in Abu Dhabi in 2008, when soaring rental prices drove inflation up to 12 per cent, might be concerned at the news this week that accommodation is again causing a spike in the cost of living in the capital. The data collected by the Statistics Centre-Abu Dhabi (Scad) assessed a tranche of costs, ranging from rents to food, fuel and utilities, at 2.6 per cent higher in February than at the same time a year ago.
The figure ought not to cause particular alarm, even though it is the biggest rise in three years and the effect, when combined with generally stagnant wages, is that the average worker is slightly worse off financially than they were a year ago. However, the underlying forces that contribute to that inflation figure ought to be on the minds of those in positions of authority.
Many of the factors that are causing costs to rise are beyond the ability of the UAE to influence, such as predictions that food prices – the single biggest contributor identified by Scad to the inflation rate – are expected to keep rising globally in at least the short term. The peg of the dirham against the US dollar also limits options since it means the central bank in Abu Dhabi has no ability to control interest rates, one of the primary tools for economic influence.
Other factors are, however, within the control of the government. The average cost of accommodation has been dropping in Abu Dhabi in recent years and is now well below that 2008 peak, with a deflationary impact on the overall cost of living. This was recognised in the decision last November to remove the rent cap, imposed in the midst of the last rent surge, to limit increases to five per cent per year. With thousands of apartments having been completed and many more about to become available, market forces of supply and demand were deemed to be sufficient to keep prices reasonable.
Moving on from the distortionary effect of that rent cap is having a temporary impact on the cost of living, although most of it is still to come, as annual leases come due. This example goes to show the short-term political appeal but long-term economic folly of artificially lowering prices of essential expenditures, as nations like Egypt and Yemen have done with subsidies of staple foods. It is a tactic to be used only in extreme circumstances and to be removed as soon as feasible.