Firstly, John Chilton has more than adequately covered and referenced the housing weighting issues of the CPI
as well as scepticism on the actual inflation rate
My issue with using the CPI in such a changing economy is that it does not reflect the changing weight on a year by year basis. While it may be useful in mature economies, since it is possible when taking time-series measurements of financial instruments, such measurements can only sense if they are expressed in "constant" money terms. This is where the CPI is useful. People also can make important decisions after hearing the actual rate, since it supposedly measures the "rate of inflation."
But, in the UAE it doesn't. Why? The weight of housing as a proportion is always changing. We're not talking a few point here. We're talking big scale issues, that would affect the CPI significantly.
What you need to bear in mind is that the CPI is not an economic variable. It is a statistic that, at best, gives an inaccurate picture of the economic phenomenon of inflation. To calculate the monthly or an annual CPI, the Central Bank or another body takes a weighted average of prices of various things that consumers purchase, and then statisticians try to figure out the various proportions of different items in a "typical" household budget. For example, that weight may be that housing costs are 30 percent of household expenditures, food costs 20 percent, petrol another 15 percent, etc. But typical in the UAE, is wide ranging. The average is skewed. What about expat versus local? What's the best way of looking at it?
The problem is that it is very difficult to monitor. Legislation loopholes mean that that the housing proportion changes based on a landlord's whim and the the speculators frenzy. The predominance of imported goods depends on other countries, in the main, the distributers and how much the shops wish to pass on those price changes. And even though there is now a government price watch
in place, Keefieboy's example of egg-stortionate
price rises come into play, perhaps even for a short period of time.
My recommendation. Ignore the CPI. It's not accurate in this changing market where price changes are extremely difficult to control.
With regard to inflation, even though an announcement today states that inflation will decrease from 7% to 4%
by the end of the year, take that with a pinch of salt - the number may reduce, but we're really looking at a higher base.
Forget the basic concept of inflation or CPI for a minute. Take it down to its base level. What was your like for like outgoings 2 years ago, last year and now this year? How much does it cost to lead that same life, without dropping your quality of life, this year, compared to previous years. The answer is probably significantly more, no matter what level of income you are on. That's what you have to bear in mind. The man on the street has no control over inflation, in real terms. All you can do is change factors to accommodate the price rises, including dropping your the quality of life. The story in the Mercer Human Resource Consulting Cost of Living Survey 2006
is indeed that Dubai and Abu Dhabi are now the 25th and 30th most expensive cities in the world to live. But there should have been more of a highlight
on quality of life. Neither city made it onto the top 50. Make of that what you wish. Is the glitz and the glam enough?