Factors affecting inflation rate Bahrain - Assignment Example

Throughout the globe, significant gains were made in fighting against increased inflation during the 1990s and there was hope that a new period of low inflation had started. Countries in Europe and Latin American succeeded in fighting inflation from higher digits to single digits, and maintaining the stability of prices of consumer goods and services. In 2000, increased inflation started to haunt the world but it was stopped in 2009 by the financial crisis (Calvo & Carmen, 2002). This paper discusses factors affecting the rate of inflation in Bahrain.

Inflation in Bahrain is driven by many factors and the exchange and interest rate laws that central bank in Bahrain implement, and the supply of money. In Bahrain, the prices of goods especially food prices affect the inflation of Bahrain. This is because increase in prices of foods and beverages implies that the country would have increased inflation this is because transportation of such goods to the markets will be costly. Further, the increase in prices of fuel implies that the prices of food stuffs increase since high prices of fuel controls the market.

It is important to note that the prices of commodities are affecting the rate of inflation in Bahrain because commodities in Bahrain are widely imported and all prices of imported goods affect inflation. However, from the calculations, it can be deduced that changes in commodity prices are not just a proxy for changes in the entire import prices (Calvo & Carmen, 2002). From the data presented, it is rational to argue that another factor affecting inflation in Bahrain is the inflation in previous years.

For instance, the momentum of inflation on goods such as foods and beverages and services such as medical care is well recorded and they result because of factors that incorporate overlapping contracts and adaptive inflationary expectations. Further, the growth of money in Bahrain because of paying utility bills such as rent, electricity and water has a direct effect on inflation of Bahrain since there is no purpose to expect important changes in the money velocity. It is also significant to note that the growth rate in Bahrain is influencing the rate of inflation in the sense that it is affected credit issues whereby increase in the growth rate of Bahrain has negative impact on inflation.

The central bank played a very important role by decreasing the growth rate to about six percent in the year two thousand and eight. The market was very stable in that prices of commodities such as food, beverages, tobacco and services such as medical care were affordable. This in turn increased the market value of these goods and services (Chen & Scott, 2004). The trend of the economy of Bahrain affects her inflation. For instance, from the calculations, the trend in Bahrain revolves at the rate at which the world market is directed in that it sets its prices in comparison to other countries.

For instance, the U.S economy is in direct contact with the economy of Bahrain. This illustrated that the movement of the trend was downward. This in turn shows that, the economy of Bahrain is positively affected rather than being negatively affectively which reduces inflation rate. Since inflation is defined as the increase in buying power of money, the easiest way to calculate the rate of inflation is by listing the prices of services and goods over the stated years commonly known as the price