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Drop in inflation: good or bad news?

Nov 23,2014 - Last updated at Nov 23,2014

During the first nine months of this year, the inflation rate in Jordan, calculated as an average of consumer prices, stood at 3.11 per cent. It is expected to decline further to around 3 per cent before the end of this year. The Ministry of Finance expects the rate to drop to 2.4 per cent next year.

Jordan has lived for long with high inflation rates, which at times reached 14 per cent before stabilising during recent years near 5 per cent. One may wonder: why is inflation lower now and why do the International Monetary Fund and the Finance Ministry expect it to continue its downward trend in the near future?   

As a matter of principle, monetary and fiscal policies usually aim at controlling inflation and preventing it from rising. The authorities would not worry much if the inflation rate is low and may not interfere in that case to raise the rate. 

The drop in the inflation rate at this time is not due to certain policies purposely adopted by the Central Bank and the Finance Ministry. Money supply is allowed by the Central Bank to rise faster than the rate of economic growth. Likewise, the Finance Ministry managed to raise its total expenditure by 13.4 per cent during the first three quarters of this year. In normal situations, these facts are supposed to push the inflation rate up, but for some reason or another, they did not.

Things being so, one can claim that the lower inflation rate in Jordan at this time did not take place due to intended monetary and fiscal policies, it took place despite such policies.

The drop in the inflation rate at this time came about due to four reasons:

First:  The slowdown of economic growth as an indication of an economic recession that reduced demand.

Second: The high unemployment rate, which prevented wages and salaries from rising.

Third: Cheap imports from countries that directly or indirectly subsidise their industries, such as Turkey and the Gulf states.

Fourth: The strong exchange rate of the Jordanian dinar vis-à-vis other currencies, which reduced the cost of imports from all countries except the United States.

An inflation rate of 3 per cent is usually used as a target for economic policies, as it secures economic stability. A 3 per cent rate is also the ideal rate for unemployment. It allows labour to move from one job to another. It is called frictional unemployment.

Based on the above arguments, all economic policies should aim at a 3 per cent inflation rate and, if possible, for unemployment as well.

As far as inflation is concerned, this ideal rate of 3 per cent has already come about. The authorities’ attention from now on should focus on reducing unemployment from its present high level of 12 per cent of the labour force, plus 4 per cent of the unemployed who gave up and ceased looking for jobs, to as low as possible, since 3 per cent in our case is not realistic. The present two percentages of unemployment are obviously too high and can cause trouble at the social and security levels.

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