Gulf inflation set to stabilize at 3%, says study

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GCC inflation is forecast to stabilize at a moderate level around the three percent mark in the near term as higher increases in housing costs are offset by lower food price rises, QNB Group report said.

“Overall, inflation in the GCC is likely to stabilize at around three percent,” QNB Group said.

Strengthening non-oil growth and expanding populations will give prices, particularly rents, some upward impetus.

“However, this is likely to be counterbalanced by falling global food prices, which will make food imports cheaper and hold back inflation.”

“Additionally, oil prices are expected to be slightly lower in 2014, which tends to ease inflationary pressures in the GCC as it results in less oil revenue flowing into the economy, weakening demand.”

“This compares with global inflation average 3.8 percent and MENA inflation of 9.3 percent in 2013-14,” it said.

Historically, GCC inflation has been low until rising oil prices and an economic boom pushed inflation higher in the 2000s.

Housing costs (mainly rents) account for 27 percent of the CPI basket in the GCC and food prices for 20 percent.

These items also tend to be relatively volatile and, therefore, account for most of the change in the direction of inflation.

“Saudi Arabia accounts for almost half of the GCC economy and rising inflation in the Kingdom has been the main driver of price increases in the GCC. Food price inflation averaged 5.8 percent in the first 6 months of 2013 as local supply constraints pushed up prices despite falling global food indices.”

“Relative to the rest of the GCC, Saudi Arabia meets more of its food needs through domestic production. Housing inflation has slowed in Saudi Arabia as a major house-building program has been rolled out, alleviating tight supply.”

“These market forces are likely to remain in place resulting in inflation remaining close to the current level of 3.9 percent,” the report said.

Moreover, it said “overall, rent inflation has averaged 2.9 percent so far in 2013. It has picked up to high levels in some countries (Qatar and Bahrain) and remains low but has turned a corner in others (UAE).”

“Food price inflation has remained low in most countries, with the exception of Saudi Arabia, in line with global food price indices as the GCC imports most of its food needs.”

“The UAE currently has the GCC’s lowest rate of inflation (0.8 percent year-on-year so far in 2013), despite strong growth in private demand, suggesting that persistent overcapacity on the supply side is holding back prices."

“Rental inflation has averaged 1.3 percent so far this year as rents have stabilized in Abu Dhabi and begun to rise in Dubai and the other emirates. The new upward direction in housing costs and diminishing overcapacity should push overall inflation steadily higher to an average of 1.3 percent in 2013 and 2.0 percent in 2014,” QNB Group said.

“Inflation in Qatar has accelerated this year as an influx of expatriates (to work on the roll out of major infrastructure projects) has driven up prices.”

“Rental inflation reached 6.7 percent in the year to June 2013 having been negative almost every month from early 2009 to mid-2012. Meanwhile, food inflation has remained relatively flat at an average of 2.5 percent so far this year.”

QNB Group forecast some further increases in rents as a number of major projects ramp up over the next year or so, resulting in slightly higher inflation at 3.6 percent in 2013 and 3.8 percent in 2014.

Rents in Bahrain have also increased rapidly, averaging 9.3 percent so far this year as they have bounced back from sharp falls in 2011 and 2012 when political instability shook the economy.

Inflation in Kuwait has been moderate so far in 2013 with rents rising by 3.2 percent on average and food prices by 3.3 percent. In Oman rent and food inflation have been relatively stable at 1.2 percent and 2.2 percent respectively.

This article was first published in The Saudi Gazette on August 13, 2013

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