Impact Of Inflation On Macroeconomics
1. Inflation
The analysis of price change is central to any analysis of macroeconomic conditions. Inflation is defined as an overall rise in the level of prices and is represents decline in the purchasing power of money. Inflation erodes the value of nation’s currency.
Inflation rate can be measured mainly by three different types of indices, viz Consumer price index (CPI), Wholesaler price index (WPI) or Implicit price deflator method.
The common measure used in the UAE is consumer price index (CPI) — the average prices of consumer goods and services purchased by households — and is released annually by the Ministry of Economy. Another metric to measure inflation is the Gross Domestic Product deflator, or GDP deflator. The GDP deflator is
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The increase in money supply also led to increase in the price of non-traded goods and services, while for small open economies with fixed exchange rates, increases in foreign inflation were transmitted to the domestic economy. Similarly, a rise in domestic credit growth also has a direct impact on inflation. Credit growth originates from monetary expansion which leads to the growth of bank and other credit intermediaries’ balance sheets, generating an expansion of consumer and corporate credit. This period was a period of monetary expansion, which are typically associated with periods of high economic activity and upward pressure on prices and wages. More businesses borrow from banks during periods of high economic activity – leading to periods of high credit growth alongside rising …show more content…
It tumbled to 1.5 percent in 2009 as a result of a steep decline in the real estate sector in most emirates, a fall in global food prices after the fiscal crisis and a strengthening in the US dollar, to which the UAE dirham is pegged.
The housing sector accounts for nearly 40 percent of the UAE’s consumer price index (CPI) and this explains its strong influence on inflation in the country.
Further in 2014, inflation is expected to be on increasing trend because Housing and utility costs, which carry a weighting of more than 39 percent on the index, were up by 2.6 percent during May’2014 compared to a year earlier. Other components of the consumer price index also edged higher in April’2014. Food and soft drinks, which account for almost 14 percent of consumer expenses, rose 2.4 percent from a year earlier. Furniture and household goods climbed 4.5 percent, while education costs rose 4.6
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