Price level and inflation in the GCC countries

- The paper identifies the determinants of inflation in the GCC countries.
- The GCC inflation rates are substantially explained by those of their trading partners.
- The exchange rate pass-through to the GCC inflation is minimal (negligible).
- Domestic factors play only a small part in the inflation rates of the GCC countries.

The prevailing pegged exchange rate system has been blamed for the recent higher inflation in the GCC countries. However, empirical evidence for period 1975-2011 shows that the short-run and long-run exchange rate pass-through elasticities to the consumer price levels of the GCC countries, in contrast to the popular belief, are either close to zero or statistically insignificant. The trading partners' (foreign) inflation is the main determinant of the consumer price inflation in these countries. Domestic factors play only a small part in the long-run determination of inflation of the GCC countries.