Are we heading for double-digit inflation? My calculations say YES

I spent my holiday modeling the 'Dual Shock' of $110 oil and a dropping tourism rate. Here is exactly how bad the math looks for the Maldives.

A person selling vegetables in Male's local market area. Photo | Naif

I was on holiday recently, trying my best to disconnect, but the news out of the Middle East made that impossible. I ended up pulling out my laptop, crunching some numbers, and building a few economic models to see exactly how bad this could get for us here at home.

Because let’s face it: the collective sigh of relief we breathed at the end of 2025—when the MMA reported that inflation had dropped to an incredible 0.4%—is completely gone now. The global landscape has shifted violently in just a few months. A sudden start of the Iran War and the escalation in the Middle East are disrupting oil supplies, and at the same time, global travel is taking a hit, threatening our tourism revenues.

For an island nation that imports almost everything it consumes, this is the perfect storm. We’re looking at a classic “Dual Shock.” Here is what the math is telling us, and what it actually means for your household budget this year.

Shock 1: The Oil Spike

First, there’s the obvious one: global energy markets. With Brent crude shooting past $110 a barrel, the cost of bringing energy into the Maldives has skyrocketed.

Economists call this cost-push inflation, but on the ground, the reality is much simpler. Fuel is the lifeblood of our supply chain. The moment STO and FSM pay more for wholesale diesel, it costs more to run a fishing boat, keep a local island generator running, or put goods on a supply ferry to the atolls. That ripple effect is almost instant.

Shock 2: The Dollar Squeeze

Then there’s the second blow. The war is messing with global travel, and any forecasted dip in tourist arrivals directly chokes off our US dollar supply.

We all know the official MMA rate is pegged at 15.42 MVR. But ask any local business importing food or building materials what they actually pay. When the banks can’t supply enough dollars, importers are forced into the black market. They pay a massive premium to get the currency they need, and they pass that extra cost straight to us at the checkout counter to protect their margins.

Under the Hood: The Math

If you want to see how I modeled this out, I used an “Augmented Phillips Curve”: a standard tool for highly exposed, small open economies like ours. The math looks like this:

\(\pi_t = \sum_{i=1}^{k} \gamma_i \pi_{t-i} + \theta \Delta \ln(P_{o,t}^*) + \beta \Delta \ln(E_t) + \delta \tilde{y}_t + \epsilon_t\)

In plain English, here is the breakdown of the above formula. Basically, tomorrow’s prices depend on four main things:

1. Past Inflation:

\(\pi_{t-i}\)

2. The jump in global oil prices:

   \(P_{o,t}^*\)

3. Local demand:

   \(\tilde{y}_t\)

   And here comes the real kicker.

4. Our effective exchange rate:

   \(E_t\)

Because we can’t pretend the official 15.42 rate is the only one that matters, the model has to calculate the “effective” rate using this formula:

\(E_t = \alpha_t E_{o,t} + (1 - \alpha_t) E_{p,t}\)

Here:

\(E_{o,t}\)

is the bank rate. And,

\(E_{p,t}\)

is the black market rate. The,

\(\alpha_t\)

is just the share of dollars actually available through the banks.

As tourism drops, that share shrinks. Businesses are forced to buy more expensive black-market dollars, driving the effective rate up. The effective rate in the formula is:

\(E_t\)

This usually hits our wallets in three distinct waves:

1. Immediately: Retail petrol and diesel prices get hiked.

2. Within 1-3 Months: Maritime freight and fisheries operating costs surge. Sending anything between atolls gets noticeably more expensive.

3. Within 3-6 Months: Shops and businesses have absorbed all the electricity and logistics hikes they can handle. They pass the rest on, meaning your weekly grocery run suddenly costs a lot more.

Where Are We Heading in 2026?

Plugging our December baseline and the current constraints into the model, I’m looking at two main trajectories for the rest of the year:

• Scenario A: The Moderate Squeeze. If oil calms down around $110/bbl and tourism only takes a slight hit (say 10-15%), the MMA can probably manage the dollar rationing. It won’t be fun, but it’s survivable. The combined pressure of expensive fuel and a mild black market premium will likely push headline inflation between 7.5% and 9.5% by year-end.

  ---

• Scenario B: The Stagflation Threat. This is the ugly one. If crude keeps climbing toward $130 or $150 and tourists decide to stay home (a drop of over 25%), the black market dollar rate could easily break 20 MVR. That triggers stagflation. The economy stalls out, but prices explode anyway. We’d be looking at inflation hitting 12.0% to 18.0%, leading to acute spikes on basic, essential goods.

That 0.4% inflation rate estimated in December feels like a lifetime ago. Over the coming months, it is not only oil prices but also keeping a watch on our tourism numbers. As long as those flights continue to arrive and bring dollars to our shores, we can withstand this challenge. If they slow down, we’re in for a rough ride.