ABSTRACT
Inflation is presently one of the most serious domestic problems of the kingdom. According to United Nations’ estimates, the increase in consumer prices was 4.4 per cent in 1971 and 1972, 16.5 per cent in 1973, 21.4 per cent in 1974 and 35.4 per cent in 1975. Global inflation results from various causes and affects most of the sectors of the economy. The Saudi Arabian economy is heavily dependent upon foreign trade and the Saudi imports constitute a considerable proportion of the total supply of the non-oil sector. The structure of the mechanism of inflation, which is based upon these three effects — import effect, salary effect and demand effect. A high rate of inflation might lead to a significant reduction in government expenditures which would result in larger investments in financial assets, this increase in the level of financial assets affecting the production of crude oil through the absorption multiplier.
