We have recently discussed the KD 1,000 Amiri Grant that Kuwaiti citizens are receiving (click here and here) in celebration of the 50th anniversary of Independence. One of the points that many talk about is that the grant is going to create inflation. Personally, I don’t feel that this is the case, as the grant is just going to be paid once and is not recurring. To further illustrate my point of view, I will take a detailed look at the issue at hand.

First, lets step back a bit and define inflation. Inflation, according to investopedia.com is:

“The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.”

So, people arguing that the grant causes inflation are claiming that the cost of goods and services is going to rise further as a result of people having an extra KD 1,000 in their bank accounts.

Now, let us look at what the CPI basket (how inflation is measured) includes to determine whether these goods and services are going to rise subsequent to the Amiri grant.

The first two constituents, Food and Beverages & Tobacco, will highly likely see no increase in prices as the major sales outlet for these products are the Co-ops, who control prices. Private markets (Sultan Center, City Center, etc.) will not raise prices as well to compete. Clothing and Footwear might see an increase depending on the retailer, but will need permission from the Ministry of Commerce. Housing will likely not be effected as the grant is too small relative to the price of land, a house, or an apartment’s rent. Some of the Household Goods & Services constituents (Furniture and Home Appliances) might be affected, but again it will depend on the retailer. Transport & Communication and Education & Health-care will not be effected as prices are regulated by the government. Some constituents of the Other Goods and Services basket (Recreational Goods, Personal Care, and Misc. Goods and Services) might be effected, but it will depend on the retailer.

So of the CPI basket, only 24% of the products might see an increase in price by retailers wanting to profit from the Amiri Grant. And even if all the products within the 24% see an increase in price, how big will that increase be? An iPhone selling for KD 290 instead of KD 280? A 5% increase? Meaning that inflation will rise by 1%. However, the scenario of everyone raising their prices is highly unlikely, making the inflation effect of the Amiri Grant weak.

Tags: Amiri Grant, cpi, inflation, KD 1000, Kuwait

This entry was posted on Thursday, January 20th, 2011 at 7:13 am and is filed under Kuwait. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.