INTRODUCTION

Since the beginning of the year, the world has experienced rapid and persistently high inflation rates. Some countries, such as the United Kingdom, are estimated to have inflation rates of 18% by Citibank in early 2023 (Schomberg and Miliken, 2022). Such figures for developed nations are rather high, especially compared to their historical trends, where long-run inflation in the UK is approximately 2.6% (Keane, 2022). As inflation rates across multiple developed and developing nations remain high, is Bahrain experiencing a similar trend of high inflation rates compared to its trends?

In this article, we will explore the latest consumer price index data, analyze, and conclude whether Bahrain is experiencing “excess” inflation rates. This article will be divided into the following sections; the first part will quickly look at some theoretical understanding of inflation, the second will analyze the data, and the third will look at a discussion and policy recommendation around the trends we find above. All data in this article is from the Information and eGovernment Authority (IGA) unless stated otherwise.

This article contributes to United Nations Sustainable Development Goals 8 (Decent Work & Economic Growth), 11 (Sustainable Cities & Communities), 12 (Responsible Consumption & Production), and 13 (Climate Action).

THE BASICS OF CPI AND INFLATION

Before we can analyze Bahrain’s current inflation situation, we first need to understand what a consumer price index (CPI) is and why inflation happens.

A CPI is a representative index that tracks the prices of goods and services households typically consume. This index aims to track changes in such price levels, where different goods are “weighted” depending on how representative consumers spend on such goods. A CPI is often created based on samples taken of goods and services, along with expenditure behaviors of a sample of consumers. With a CPI, we can calculate how consumer prices change over time. We can calculate inflation rates by taking the new price index and subtracting it from the old price index and multiplying it by 100 to give us the inflation rate. Often we look at the 12-month inflation rate to understand how prices have changed across a given year (in any given month, for example, from April 2009 to April 2010).

With some basics of what a CPI is, we can look at what makes up the “basket” for Bahrain’s CPI index. Below are the main categories and weights which are measured:

As per the most recent weights for the CPI, Housing and energy-related expenditures, transportation, and Food & Non-Alcoholic Beverages represent the vast majority of the average household's spending. Examining this, we can now define what we mean by inflation. Inflation can be defined as the change in price levels from a given point in time. For example, our CPI was 100 in the first month and 103 in the second. This would mean that prices have increased by 3% between the first and second month. This can also be calculated for every component (and weighted according to their component weights).

The next question we need to ask is, why do prices change? To simplify, changes in market conditions in the economy can lead to changes in price levels. These can come in two ways, demand-related changes in markets and supply-related changes. Under demand-related changes, when overall demand for goods and services increases (decreases) in the short-run, holding supply constant, this increases (decreases) the equilibrium price level as shown by the graph below:

We would see the opposite effect in an example of an increased supply. An increase (decrease) in aggregate supply would result in a decrease (increase) in equilibrium price levels, as shown below:

Overall, changes in technological progress, new entrants into markets, and other factors surrounding wages, capital rental rates, and availability of material inputs affect the supply curve. On the demand side, changes in income and trends can affect demand.

In the news, it is often referred to that central banks aim for a certain inflation rate. This is because it provides what is often referred to as a "nominal anchor" for the economy (Jahan, n.d). A nominal anchor allows policymakers to stabilize prices around targets, allowing policymakers and central banks to respond to "shocks" to the economy. In addition, more stable inflation rates can reduce "economic agent" uncertainty and thus create expectations for future price levels. In particular, the Central Bank of Bahrain does not follow a set target inflation rate but aims to keep a fixed exchange rate with the US Dollar (Central Bank of Bahrain, n.d.).

Now that we have a quick general understanding of CPI and inflation rates, we can begin looking at analyzing price levels in Bahrain.

ANALYZING PRICE LEVELS IN BAHRAIN

The data which we use is CPI data spanning from December 2016 to June 2022. While this time frame is not a large number of observations, it contains useful data that will allow us to analyze specific categories. Before we continue, some treatment has been done towards the data. First, we seasonally adjust the data to account for any usual seasonal trends within the data (such as holiday spending sprees during a particular year of the month). Next, we then create trends for CPI using what is called a Hodrick-Prescott (HP) filter.

Looking at our CPI data, we can see how individual components and the overall inflation rate correlate via a correlation matrix.

Here we see some interesting dynamics in how individual components correlate. For example, in terms of overall CPI, we see that Restaurants and hotels are “very strongly” correlated with the movements of overall CPI, recreation, misc goods & services are “strongly” correlated with the movements of overall CPI, whereas items such as clothing & footwear, housing & energy, transportation are moderately correlated with movements of overall CPI.

The ‘very strongly” and “strongly correlated items indicate that their movements show that as aggregate demand increases, it is primarily around “leisure” activities rather than necessity goods such as Food and beverages. Compared to items such as Food & Beverages and transportation, which have a “low” correlation with movements of overall CPI, the data indicates that consumers substitute away from necessity goods and services for “luxury goods”, as expected.

Looking at overall CPI inflation rates, we see that currently, inflation rates are somewhat elevated compared to their “expected levels”:

Furthermore, we can see some interesting trends in this 12-month inflation rate data. The first portion highlighted shows the effects of the COVID-19 pandemic. We see in the data deflation rather than inflation, where price levels reduced throughout the pandemic compared to 12 months ago in a given month. This deflation rate is also larger than the “expected levels” of deflation. However, in this case, they are not excessive if we define “excessive inflation/deflation rates” as being statistical outliers.

Looking at current data in 2022, we see a similar trend, although inverted. We see that inflation rates throughout 2022, particularly in March, are elevated beyond their expected levels. Still, if we define “excess inflation rates” as being outlier data points, we can consider inflation rates as not being “excessive”.

The question we should ask ourselves is, what are the main drivers of inflation? We can look at how each component contributes toward changes in price levels (accumulated) from June 2021 to June 2022. What we see is that food, transport, and restaurants & hotel changes in price levels are what contribute to the vast majority of elevated inflation rates:

Pre-2022, we see that while food prices contributed towards a large portion of inflation rates, the overall CPI inflation rate from June 2021 to December 2021 was 1.06%, well within expected levels. Post-2022, where inflation rates are elevated, we see that food still contributes towards a significant portion of the accumulated price change from June 2021, in conjunction with transportation, hotel & restaurant components.

We’ve established two things in this analysis. First, we see that 12-month inflation rates are elevated but are not excessive compared to our historical data. The second is that it appears that food, transport, and restaurant & hotels are the main “culprits”. However, what is important is how price levels overall and by each component look compared to their trend. Furthermore, are there indications based on the fitted trend that prices are stable or are experiencing excessive changes? First, we look at the overall CPI:

We see that, as with our data, overall price levels appear elevated compared to its trend. Still, there’s no indication as of yet that price levels and its trend indicate any form of “excessive” inflation. When looking at our components, we see that with transport, and restaurant & hotels, their price levels appear to show similar trends to overall CPI (Appendix A). However, when looking at Food & Beverages, we see that both the price levels and its trends exhibit significant increases:

From the trend, we see that food and beverage prices have substantially increased by 2022, which is confirmed by the 12-month inflation rate calculations (Appendix B). Additionally, we see that the trend exhibits an exponential like rise in its prices compared to that of the overall CPI and other components. From the price levels, trend and 12-month inflation rate data, Food & Beverages appear to exhibit “excessive inflation”. Within the Food and beverage component, we see that meat & seafood, dairy, and related sweet products are responsible for the vast majority of food & beverage inflation in 2022:

From the trend above, we see that while these items are vastly responsible for the significant spike in price levels, we see that as food price levels start to stabilize and their 12-month inflation rates are also returning to their expected levels, these items account for less of food and beverage inflation rates (as seen towards May/June 2022).

DISCUSSION AND POLICY RECOMMENDATIONS

So far, we have seen how different components interact with one another, how current overall inflation rates look, what are the drivers of current elevated inflation rates, and discussing how food and beverage prices are currently exhibiting excessive inflation rates. The question we need to ask is, why are food and beverage price levels rapidly increasing, in particular since 2022?

A significant contributor to worldwide food price changes is the war in Ukraine (Barua, 2022). Ukraine is a large exporter of global wheat, barley, maize, rapeseed, and sunflower production, meaning that the impact of the war can be felt across the global agriculture food chain, given that such crops are unable to be exported to their intended destinations easily. However, as Barua, 2022 points out, to solely blame the war in Ukraine would be incorrect. Other factors related to the current supply chain crises include higher freight costs and fertilizer prices.

This, in turn, may also contribute to meat and dairy products significant rise in prices. Grain is one input contributing to the current significant increase in meat prices. In addition to this, higher labor & energy prices are argued to be contributing factors (Torrella, 2022). Additionally, a bird flu outbreak is also responsible for the "shortage" of birds available for consumption. However, others have argued that meat producers (in the US) are currently abusing their monopoly power (Torrella, 2022).

Concerning Bahrain, the kingdom imports 90% of its food supply (Grewal, 2021), which is likely why shocks, as discussed above, are transmitted to food prices. However, while Bahrain mainly imports most of its food supply, efforts have been undertaken pre-2022 to elevate food security in Bahrain, or rather self-sufficiency of production (TDT, 2022), where new projects into the production of eggs and other products will raise Bahrain’s self-sufficiency rate from 20-23% to 35-45%.

However, what specific policy recommendations should be taken? In the short-term, support for those who require social support should continue to move forward to ensure that the poorest households purchasing power is minimally affected by significant changes in food prices. Current policies have successfully achieved this as Labour and Social Development Ministry had already increased social allowances by 10% at the beginning of 2022 (Daaysi, 2022).

In the Long-term, efforts should continue to achieve self-sufficiency in terms of agricultural output. Initiatives such as increasing vegetable, fishery, and egg & poultry production are already underway (Grewal, 2021). While such initiatives are needed, a potential alternative that may yield higher benefits could be encouraging the consumption and production of plant-derived foods.

The argument surrounding shifting consumption and production towards plant-derived foods is that their ecological and resource footprint is significantly less than that of animal-derived foods. We can see this by looking at their carbon footprint, land use, scarcity-weighted water, and eutrophication impact/use for every 1000 calories of each food item:

We see that, in general, plant-based foods use fewer resources and are less environmentally damaging than animal-derived food items. For example, beef is nearly 10 times more intensive than the average resource/environmental damage per 1000 calories derived from each food source. Combining the items into animal-derived and plant-based products, we can see that animal-derived products are 4.1 times more resource and environmental damaging intensive, whereas plant-derived items are 0.52 times.

Ultimately shifting consumption and production towards plant-based items will reduce resource needs for food security and potential environmental damages. Furthermore, from a health perspective, a plant-based diet can improve health conditions and avoid certain adverse outcomes such as cancer and heart disease (McManus, 2020). However, it requires careful planning for vitamins and minerals that are not easily found in such diets. Therefore, this can act as a double dividend that can potentially reduce obesity rates in Bahrain (which carry significant economic costs towards the economy).

Overall, we can conclude that the Kingdom has taken significant steps in the short-term to assist those who are most affected by excessive inflation in food prices, whereas in the long-term, the Kingdom has also taken important steps in attempting to increase its food security and self-sufficiency through its initiatives, although there are potentially more viable alternatives to increase such food security and self-sufficiency further by attempting to transition towards more consumption and production of plant-based foods.

Featured

Jan 17, 2019

Baland Al Rabayah, MM, EM

Baland Al Rabayah- Director

Jan 17, 2019

Baland Al Rabayah, MM, EM

Baland Al Rabayah is the co-founder and Director of BRG. He currently holds a Diploma in Accounting and Finance from Bangor University, a Bachelor of Science (BSc) in Accounting and Finance from Bangor University, and a Masters degree in Applied Economics from the University of Strathclyde. Baland will begin his PhD studies at the University of Strathclyde in 2022 looking at the economic effects of renewables on the GCC economies (energy transition). Baland’s interests are in Environmental, Energy, Public Policy, and Health Economics.

email: b.rabayah@bhres.group

APPENDIX A

Below are the graphs for transportation and restaurants & hotels.

A1 Restaurants and hotels with borders.png

From the graphs, we see that for transportation, the price levels have generally stuck towards their trends with the exception of a dip towards the end of 2021, which then increased above its trajectory. As for restaurant & Hotels, we see that prices had dipped below its trend line due to the COVID-19 pandemic, but then had steadily increased up until 2022, where it is now above its trend line. This is likely due to an increase in food prices, but these prices appear to not completely be passed onto consumers.

APPENDIX B

Below is the 12 month inflation rate for food and beverages:

We see here that food and beverage 12 month inflation rates are significantly higher than the expected values between ~0% and ~4%. Furthermore, the shaded part of the graph shows that the values here indicate towards excessive inflation as they are outliers compared to the rest of the dataset. Combined with the price level and trend graph which we’ve seen above, this gives us indications that inflation for food and beverage prices are excessive.

APPENDIX C

This section will look at how we calculate the “relative” intensity for a given environmental/resource factor that we’ve explore above. From the food groups which we have above, we look at each food items usage and calculate the outlier-adjusted average. We then take each food items resource usage/environmental damages and divide by the outlier-adjusted average which provides us the “relative” intensity for each item. Below are the calculations for GHG, land usage, water usage, and eutrophication:

From here, using the relative intensity factors for each individual item, we can then create an average across the four categories, which allows us to compare how intensive each items are in terms of resource usage/environmental damages across the four different categories: