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Reasons for lower inflation

Jun 29,2015 - Last updated at Jun 29,2015

When world prices of petroleum were sky high, the inflation rate in Jordan, measured by the consumer price index during the first nine months of 2014, was 3.11 per cent.

This rate declined to 2.8 per cent for the whole 2014, following the unexpected drop in world prices of petroleum.

The Ministry of Finance expects the rate of inflation to continue to decline during 2015, to reach 2.4 per cent if not less. 

Jordan is familiar with high rates of inflation, which at times reached 14 per cent and stabilised during recent years above 5 per cent.

One may wonder about the reasons for the lower inflation, which started to happen even before the major drop in petroleum prices, and why inflation is expected to continue to decline in the near future. 

As a matter of principle, monetary and fiscal policies are normally formulated in a way to control inflation and prevent it from rising.

Rarely does lower inflation cause the authorities to worry and try to intervene to raise the rate of inflation.

The present decline in inflation rates is not a result of certain monetary or fiscal policies. In fact money supply is rising faster than the growth of the economy.

Likewise, public expenditure is extensive and on the rise. These facts should have caused inflation to rise as well.

The present low inflation in Jordan is not caused by monetary or fiscal policies. It actually is low despite these policies.

The present low inflation is the natural result of a general slowdown of the economy.

Economic recession reduces demand and unemployment prevents wages from rising. To that are added increased imports from countries that subsidise their industries, such as Turkey and the Gulf states.

In addition, the rather high exchange rate of the dinar against other currencies (excluding the dollar) reduced the prices of imports from many countries.

Lower petroleum prices reduced the consumer price index during the first five months of 2015 by 2.63 percentage points. The actual reduction was only 0.81 per cent negative, meaning that the rate of core inflation is 1.82 per cent positive.

The healthy rate of annual inflation desired by economists is 3 per cent, which secures economic stability.

It is also the healthy rate of unemployment, which allows the mobility of labour.

The objective of all economic policies is therefore to keep both inflation and unemployment at around 3 per cent.

As far as the inflation rate is concerned, this objective is already achieved.

Authorities should therefore concentrate their efforts on creating jobs, to bring the unemployment rate down from the present very high 12 per cent, with 4 per cent more that represent those unemployed who gave up and ceased searching for jobs.

 

These are obviously very high rates, with possible negative consequences at social and security levels.

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