The uncontrolled increases in prices have resulted in sharp rise in cost of production in all sectors.

“We are facing problems on all fronts as a locally based manufacturer,' said Amjed Ali, an Ajman based furniture manufacturer and a major sub-contractor for the local boat making industry.

“In one year, our raw material cost has gone up by more than 30 per cent. Labour cost too is rising. The worst seem to be on our way — last month we lost 10 of our best carpenters and 6 technicians who opted for better paying jobs in Qatar,” he said.

The shortage of skilled labour is already being felt in many sectors of the economy. “We no longer get good skilled labour at viable costs. A good automobile mechanic is not willing to take up a job for anything less than Dh4, 000 per month. A year ago we could get the same labour for half that money,” said G.S Menon, owner of an automobile workshop and denting work unit.

Rising rent had also forced Menon to shift his garage from Sharjah's Industrial Area one to a remote location near Sharjah University. A recent survey by HSBC and the Middle East Economic Digest confirms the fears of local business community. The survey had indicated that a shortage of skilled labour could hurt businesses in the region. As it is already happening, a number of skilled personnel are leaving their jobs because they simply cannot afford the rents and rising cost of living.

“Three-quarters of the respondents to the survey said there is shortage in skilled labour, while 80 per cent of contractors who said there was a skill shortage, almost half described the situation as serious.”

The price-hike has already started to have a damaging effect on the UAE's status as a cost effective business hub. Many analysts fear that the high prices may put the brakes on the country's rapidly expanding non-oil economy while hurting investments and tarnishing its reputation as a cost-effective place to do business.

The vexing issue of inflation from excess liquidity from oil prices and regional investment inflows and the imported inflation resulting form declining dollar (dirham is pegged to dollar) has complicated the issue further. According to economists, UAE's monetary policy measures are weak as far as inflation targeting is concerned.

“The local interest rates follow the US rates due to the direct currency peg. The only other monetary policy tool used in the country is the sale of certificates of deposit (CDs) by the central bank. It is time the central bank had some control over the liquidity in the financial system through a variable or compulsory reserve ratio imposed on time and demand deposits held by banks,” said an economist.

The use of interest rates as an inflation control tool has become a problem in itself rather than a solution to the rising costs.

“Minor interest rate adjustments are inadequate to deal with the overwhelming impact of high liquidity in the UAE. The dear money policy can work as an anti inflationary tool only when the relative impact of liquidity is small and its opportunity cost is high,” said an economist with a foreign bank.

The widening gap in disposable incomes of different strata of the society has begun to take its toll on consumption. The availability of skilled labour is shrinking, as wages have not risen in line with the prices. However, if the wages are to rise in proportion to the increasing prices, it risks another inflationary spiral. Although there is no quick fix solution in sight to control inflation, economists say that it is time policy makers began tackling rising costs to keep the domestic industry economically viable.