The US dollar/ euro exchange rate is now around 10 per cent higher than this time last year. This will take some of the steam out of imported cost inflation. It should also reduce the incentive for people to invest in dollar-pegged GCC currencies in anticipation of revaluation.

If the dollar recovery continues, and the US currency gets a boost with the election of a new American president, the need to end the peg policy - as pursued by five of the six GCC states - will look less pressing. Some speculators are moving on, having decided that the bulk of opportunities in GCC currency arbitrage have already been taken.

Crackdown

Oil prices in mid-August were $30 lower than just over a month earlier when they had reached a record high of almost $150. They are expected to fall further, to about $80-90 a barrel, by the end of the year. This fact alone will reduce the speculative capital flows inflating oil economy assets. The disappointing trend in GCC stock markets this year is also helping to contain expectations.

Meanwhile a government crackdown has begun that has already caught up some of the region's biggest real estate firms, although it is too early to say what the impact will be in the UAE. But it will encourage investors to think more carefully about future forays into the federation's property market and the affair may trigger the long expected correction in real estate prices.

Economists are revising down their forecasts for world economic growth in 2008 and beyond. Depression may be avoided, but lower demand than previously expected is likely for most goods and services.

Horribly high

These factors should help to contain GCC price increases, but there is little prospect of lower inflation without slower growth in domestic liquidity.

The most extreme trends have been reported in the UAE, where the broad M2 money supply aggregate grew by 42 per cent in the year to the end of March - the last date for which figures are available. This is a horribly high figure that can only fuel inflationary expectations.

But there are now some encouraging signs. Latest money supply figures released by the Saudi Arabian Monetary Agency (SAMA) show that the M3 money supply aggregate grew by about 3 per cent in the second quarter, compared to more than 5 per cent in the first, and by 21 per cent year on year to the end of June, compared to 23 per cent for the year to the end of March.

Measured

In Kuwait, M3 growth in the year to the end of June was 18 per cent, five per cent lower than it was in the 12 months to the end of May.

There is no evidence yet that all this adds up to less GCC inflation soon; double digit price increases are still likely across the region in 2009.

But the initial phase of this year's Gulf boom is drawing to a close, as the world economy takes time to digest the structural change in oil and other commodity prices over the past five years. The hope is that the second phase will be more measured and less inflationary than the first.