An explosion in your US dollar income is not a bad problem to have. The United Arab Emirates and other Gulf oil exporters, however, have chosen the wrong way to handle it. Rather than revalue their currencies, and peg them to something more appropriate than the US dollar, they have chosen to allow a large domestic inflation. That has unnecessary costs.

A report published by Abu Dhabi’s department of planning and economy says that the United Arab Emirates has floated the idea of tracking a basket of currencies in place of the dollar. To do so would be a way to reduce inflation, which is measured at 11 per cent in the UAE, 14 per cent in Qatar, and similarly high levels in other Middle Eastern oil exporters.

The cause of price rises is simple. Oil used to sell for $20 and now fetches $145 – so the UAE has got much richer. The domestic economy of apartments, shops and hairdressers, however, cannot expand so quickly and that means a choice. The UAE either keeps its currency pegged to the dollar, in which case too many dirhams will chase too few goods, and prices will inevitably rise; or else revalue the dirham so each one is worth more dollars.

Both options achieve the same end result but inflation has greater drawbacks. First, it is slow, whereas revaluation is instant. Second, once started, inflation is hard to stop because workers demand higher wages to compensate. Third, there is a risk of asset price bubbles in the Gulf nations because high inflation means that real interest rates are too low. Fourth, inflation hurts the poor (who do not have direct access to oil revenues), and so harms political stability.

There is also a specific problem with pegging to the dollar. Gulf currencies have actually had to depreciate against the euro in order to follow the dollar, the exact opposite of what they need, and a shift that will cause even more inflation.

Countries such as the UAE cannot simply adopt a floating exchange rate, however. They are too small, and dependence on a volatile commodity makes it all but impossible to predict what their purchasing power will be the year after next, and what a sensible monetary policy might therefore be.

The Gulf needs to peg to something. A first step (after revaluation) would be to peg to a basket of currencies that included the euro and the yen. A bolder step would be to include the price of oil in that basket, so that currencies would appreciate when oil is strong, and depreciate when it is weak. That would make for smoother adjustments than double-digit inflation.