Does the Amiri Grant Really Cause Inflation? « Alpha Dinar- talking Gulf finance

We have recently discussed the KD 1,000 Amiri Grant that Kuwaiti citizens are receiving (click hereand 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 serivces 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 constituants, 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 affected as the grant is to small relative to the price of land, a house, or an apartment’s rent. Some of the Household Goods & Services constituants (Furniture and Home Appliances) might be affected, but again it will depend of the retailer. Transport & Communication and Education & Healthcare will not be affected as prices are regulated by the government. Some constituants of the Other Goods and Services basket (Recreational Goods, Personal Care, and Misc. Goods and Services) might be affected but it will depend on the retailer.

So of the CPI basket, on 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 pricem how big will that increase be? An iPhone selling for KD 290 instead of KD 280? 5% increase? Meaning that inflation will rise by 1%. However, the scenario of everyone raising their prices is highly unlikely, making the Inflation affect of the Amiri Grant weak.