Following the COVID-19 shock, inflation reached multi-decade highs in many countries as demand recovered from the pandemic,  supply chain disruptions persisted, and  commodity prices surged, exacerbated by  Russia’s war in Ukraine and the lingering  pandemic. This recent global surge in inflation  has led to a renewed interest in identifying the  key drivers of inflation dynamics so that  policymakers can assess its persistence and  design appropriate policies. Although inflation  in the GCC region1 is relatively low as  compared to the rest of the world (Text Figure),  it has picked up strongly during the pandemic.Given these recent developments in inflation, it  is important to accurately diagnose its main  drivers and design appropriate policies to  preserve price stability and keep inflation expectations anchored, while safeguarding economic  activity. 

Inflationary pressures have built up in oil-rich GCC countries from a low base since early  2021. Inflation in the region averaged about 1.5 percent in 2021 and 4.2 percent in 2022, which  is a sharp increase as compared to 0.1 percent  in 2019. The largest increases were in Qatar and UAE and the lowest for Oman and Saudi  Arabia in 2022 (Text Figure). Most of the  inflationary pressures have been from  tradeable goods, especially from food and transportation, indicating that GCC was not immune to higher global prices during the pandemic. However, even though food inflation has been on an upward trend, it has remained  below MENA peers, which can be explained by  the prevalence of administered prices,  subsidies on certain food products, and stockpiling of basic food items such as wheat in line with the  national food security strategies2 (IMF, 2022a).