Determinants of Inflation in Kuwait

Despite the ability to determine whether an economy is experiencing inflation, there is no consensus on what causes it. In this study, the attempt will be made to identify the determinants of inflation in Kuwait. Kuwait was chosen on the grounds that it is a small rich country with significant surplus of money and highly dependent on oil revenues and imports of goods and services. In addition, it experiences little fluctuations in the value of its currency. Furthermore, Kuwait runs two competing banking systems: Islamic and conventional. While the Islamic banking system excludes paying or receiving interest from all its transactions, interest governs all transactions incurred by the conventional banking system. Hence, Kuwait forms a unique case to study causes of inflation. Hence, the current study examines whether inflation measured by the consumer price index (CPI) is effected by exchange rate, interest rate, taxation, imports, current account, unemployment, gross domestic product (GDP), and money supply. To identify variables affecting the level of inflation in Kuwait, annual data were collected from the World Bank Data Bank for the period between 1979-2015. The relationship between inflation and other economic variables were tested by performing a multiple linear regression analysis. The findings of the study demonstrated that changes in CPI are positively and significantly influenced by changes in interest rate spreads, imports of goods and services and money supply. Negative and significant association appeared between changes in the CPI and changes in tax revenue and current account balance. Although changes in the GDP and unemployment were among the factors that were responsible for changes in CPI, their effects were not statistically significant. Studying the determinants of inflation in Kuwait is of interest for scholars and policy makers alike. For the former, studying a rich and a small country like Kuwait with surplus of liquidity would add a new dimension to the literature. For the latter, it would assist them in adopting appropriate policies to deal with future inflationary problems. Bearing in mind that this study is covering almost four economic cycles, it will give a clear picture about the reasons underlying inflation in Kuwait.