Let us first underline the main points in our presentation where we shall talk about:
1- What inflation looks like?
2- What is the definition of inflation and what is the deflation?
3- What are the reasons of inflation?
4-What are the different kinds of inflation?
5-How do we measure inflation?
6-What are the recent levels of inflation in the world?
7-What about the rate of inflation in Qatar?
8- Governments’ efforts to control inflation.
9-Is inflation an old or a new phenomenon?
1- What inflation looks like?
It is well known that the inflation is an economic and monetary phenomenon and it occurs as a result of the interaction between the economic variables. To give a simple imagination for the inflation in an economy, we represent the economy by a human body which has many systems to perform the different functions of our life, i.e. the digestive system, blood c……..
In each minute of our life, the human body is doing thousands of internal operations. If every thing is ok then the temperature of the body will be stable around 37 centigrade. In any case of imbalance in these operations, then the body’s temperature will rise up to 41 centigrade. The life could come to the end if the temperature exceeds that level.
In the economy, we have also multi systems for production, consumption, saving, investing, banking, export and import. There should be a balance in the aggregate variables of these systems; otherwise the economy will face either inflation or deflation. So:
The inflation is an indicator for the stability of the economy as same as the temperature is an indicator for the healthiness of the human body.
2-a What is the definition of inflation?
The word inflation refers to a general rise in prices measured against a standard level of purchasing Power. Or: It is a persistent increase in the average level of prices.
2-b And what is the deflation?
It is a general falling level of prices due to a reduction in economic activity.( the rate is< zero, or negative) This means that the economy rate of growth is weak and so, there is an increase in unemployment and this leads to a lack of aggregate demand.
2-c And what is the disinflation?
It is the reduction of the rate of inflation, i.e. to lower the rate of inflation from 5% to 3%. The opposite is reflation which is an attempt to raise prices to counteract deflationary pressures.
3-What are the reasons for inflation?
There are different schools of thought as to what causes inflation:
*Demand-pull inflation: This type of inflation arises when aggregate demand greater than aggregate supply. This usually happened when governments increase the public expenditure or decrease taxes, and thus firms and consumers increase their spending. This is commonly described as too much money chasing too few goods.
*Cost –push inflation or supply-shock inflation is a type of inflation caused by large increases in the cost of important goods or services where no suitable alternative is available. The famous example for the cost-push inflation is the inflation experienced in the Western countries in the 1970’s as a result from the sudden increase in the cost of oil.
* The imported inflation experienced recently in the Gulf countries as a result of their currencies depreciation against the Euro.
4- What are the different kinds of inflation?
1-Deflation: where the rate of inflation is negative.
2-Creeping inflation: low or normal rate of inflation ranged between 2-3%.
3-High inflation: any rate of inflation more than 3% is considered high inflation especially in the advanced economies.
4-Hyper inflation: It isout of control inflation, where prices increase rapidly as a currency loses its value. No precise definition of hyperinflation is universally accepted. One simple definition requires a monthly inflation rate of 20%. In my opinion, any rate of inflation of more than 50%annually should be considered hyperinflation. The definition used by most economists is an inflationary cycle without any tendency toward equilibrium. Hyperinflation is often associated with wars (or their aftermath), economic depressions, and political or social upheavals.
5- How do we measure inflation?
There are many measures of inflation, depending on which basket of goods and services are used as the basis for comparison:
1-Consumer price indices (CPI’s): which measure the cost of a selection of goods purchased by a typical consumer as a percentage of the cost of the same basket at the base year.
2-Producer price indices (PPI’s): which measure the price received by a producer. This differs from the CPI in that price subsidization, profits, and taxes may cause the amount received by the producer to differ from what the consumer paid. There is typically a delay between an increase in the PPI and any resulting increase in the CPI.
3-GDP Deflator measures price increase in all assets rather than some particular subset. The term deflator means the percentage to reduce current prices to get the equivalent price in a previous period.
6-What about the recent levels of inflation in the world?
Table No (1) gives you an idea about the prevailing rates of inflation in major countries in the period 2000-2006.
Table (1)
Inflation rates in the world (%)
2000 2001 2002 2003 2004 2005 2006
United States 3.4 2.8 1.6 2.3 2.7 3.4 3.2
Euro area 2.1 2.4 2.3 2.1 2.1 2.2 2.2
Japan -.04 -0.8 -0.9 -0.2 – -0.6 0.2
Qatar 1.6 1.4 0.2 2.3 6.8 8.8 11.8
Middle East 4.0 3.8 5.3 6.2 7.2 7.1 7.9
Angola 325.0 152.6 108.9 98.3 43.6 23.0 13.3
Zimbabwe 55.6 73.4 133.2 365.0 350.0 237.8 1016.7
Source: IMF, World Economic Outlook, April 2007
7- What about the rate of inflation in Qatar?
In the last 35 years, Qatar has experienced low or creeping inflation except in the following periods:
1- 1975-1977 inflation rate jumped as a result of rent rising to high levels and due to imported inflation.
2- 1987 -1992 Qatar experienced a high inflation rates especially during the Iraqi invasion to Kuwait.
3- 2004-2007. Qatar experienced a high inflation due to rent rising and imported inflation.
Table (2)
Consumer Price Index in Qatar (2000-2006)
2000 2001 2002 2003 2004 2005 2006
General Index 98.6 100 100.2 102.5 109.5 119.1 133.2
Food, B. & T. 100.2 100 101.2 100.9 104.2 107.5 115.4
Clothing & F. 97.5 100 98.3 96.8 104.6 101.8 114.5
Rent & F. 98.5 100 101.8 120.1 139.6 176.2 221.9
Furniture 98.7 100 97.1 98.6 101.9 106.7 110.9
Medical Ser. 93.9 100 101.1 92.6 98.9 103.3 104.6
Transport &C 98.9 100 97.8 100.4 96.0 99.7 101.6
Edu. & Cul. Recreation 95.6 100 95.9 99.4 102.3 102.2 104.5
Miscellaneous 99.1 100 105.2 106.0 110.3 114.9 130.5
Source: QCB, database
8- Governments’ efforts to control inflation
There are a number of methods that have been suggested to fight inflation. Central banks can affect inflation to a significant extent through setting interest rates and through other operations using monetary policy. High interest rates (and slow growth of the money supply) are the traditional way that central banks fight inflation, using unemployment and the decline of production to prevent price increases.
Meanwhile Keynesians emphasize reducing demand in general, often through fiscal policy, using increased taxation or reduced government expenditure to reduce demand as well as by using monetary policy.
Another method attempted is simply instituting wage and price controls incomes policies. Many nations set prices for basic commodities as bread, rice and gasoline (subsidizing policy).