If the recent inflation rates rose than 5% for long time, it would be high and troubling. Saudi families lost more than 5.4% of their real income during 2010 (i.e. 540 Riyal of 10000 Riyal) as a result for the high increase in living costs (inflation rate) to 5.4% in December 2010 comparing to the same month of the last year. Saudi families lost 26.4% of their real income from June 2007 till December 2010 (i.e. 2640 Riyal of 10000 Riyal) because the inflation rate rose to 26.4% during the same period. Most of the loss was because the increase was 53.1% for residences category during the same period; 32.1% for goods and other services category; 31.4% for beverages category; 19.8% for furniture category; and 10.3% for medical care category (See the fig. below). Inflation and low purchasing power of currency: There is an inverse relationship between both: the increase of prices decreases the purchase power and vice-versa. So, the country is always trying to avoid the high rates of inflation through financial policy (Ministry of Finance) and monetary policy (Central Banks). Some central banks of the world try to stabilize the inflation rate such as European Central Bank 2%, Canadian Central Bank 1.4%, British Central Bank 2% and Australian Central Bank 2%-3%. As for the remaining central banks, it aim at the prices general stability without specifying aimed inflation rate. In that case, the standard of stability is subject to the effects of inflation rates, i.e. it must not affect the decisions of individuals and companies in the same generation. This could not be achieved when the inflation rate is still more than 5% annually for long time. Inflation treatment: First of all, we must differentiate between inflation treatment and the inflation effects treatment. The effects could be treated by either support or compensation policies. For each policy there are advantages and disadvantages. As for inflation treatment, it is more complex and requires the unity of many authorities to achieve the prices stability, for example: General Statistics & Information Department as the main responsible for collecting price data and the inflation rate in Saudi Arabia, Ministry of Finance as the body which is responsible for creating and applying the financial policy, Saudi Arabian Monetary Establishment as the Central Bank responsible for applying the monetary policy and Riyal exchange rates, Ministry of Commerce as responsible for the commercial activities in Saudi Arabia, and other bodies as media, agents, suppliers, merchants and consumer. So, I will discuss this in separate essay about the role of each authority to decrease the inflation rate and provide the minimum prices stability.
