Energy price reforms to raise Saudi inflation

The recent energy price reforms in Saudi Arabia are likely to take inflation higher, Jadwa Investment said in its latest report. It estimates average annual inflation at 3.9 percent for 2016.

Foodstuffs rose by 1.3 year-on-year in January, slowing slightly from the previous month and impacted in part by the continued deflationary trend in international food prices. On monthly terms, food prices fell by 0.7 percent in January compared to an average monthly rise of 0.1 in 2015. This was driven by a fall in prices of nearly all components under the foodstuffs segment.

“We anticipate domestic inflationary pressure to intensify during the year, driven by second-round effects stemming from the recent energy price reforms. Higher energy and transport costs for other businesses should somehow lead to higher prices for consumer goods, which will put pressure on other components of the CPI basket,” the report said.

Moreover, Jadwa forecast the government to increase its monitoring of any unjustified rise in prices of basic foodstuffs and commodities. The Ministry of Commerce and Industry (MCI) already carries out inspection rounds and takes legal procedures against any price violations or manipulative activities, all of which will likely be intensified to ensure that prices remain stable.

“We also expect that higher energy prices will likely have a negative impact on consumer spending, in the form of lower disposable income, which would reduce any price pressures on other commodities. We maintain our expectation that the steady increase in housing inflation rate will continue, driven mainly by strong domestic demand for housing units. We expect external factors’ contribution to inflation to remain subdued, particularly given a strengthening USD and the weaker prospects of global economic growth, leading to lower cost for imports and foodstuffs. The combination of these factors together with an expected continuation in the slowdown of the core index lead us to maintain our estimates for average annual inflation at 3.9 percent for 2016.”

The General Authority for Statistics (GAS) has released Consumer Price Index data for January, showing a sharp rise in prices by 4.3 percent year-on-year, accelerating from 2.3 percent during the previous month. The recent reform to energy prices meant that housing, utilities and transport were the main sources of inflation as they accelerated sharply in January, both in year-on-year and monthly terms.

“Our estimate of core inflation, which excludes food, rent and other housing services, but includes transport, rose to its highest level in three years, reaching 3.7 percent year-on-year in January compared to 1.8 percent in December, mainly impacted by the rise in the transport segment. Other components of the core index posted mixed results,” Jadwa report said.

According to the report, as a result of recent reforms in energy prices, housing, utilities and transport segments have been the key drivers of inflation.

The housing and utilities segment rose from 4 percent year-on-year in December to 8.3 percent in January, its highest in six years. This was a clear result of the recent energy price increases, which impacted electricity and water tariffs, both captured in the electricity and water sub-groups of this segment. The electricity sub-group rose sharply from just 0.1 percent year-on-year in December to 12 percent in January, while the water sub-group reversed its fourteen-month deflationary trend to post a 135 percent, year-on-year rise. Month-on-month rises to electricity and water prices were also significant. The year-on-year change in the rental inflation sub-group reached 4.1 percent in January, slowing from 4.8 percent during the previous month. Despite rental inflation being the major sub-group of the housing and utilities segment, its slowdown did not prevent the overall segment from rising to its 4-year high.

Transport saw the largest acceleration amongst all segments with its contribution rising from just 5 percent in December to 26 percent in January.

The report compared the current situation to the one back in 1995- the year featuring a similar price hike- when annual transport prices rose by 15 percent. However, it noted that due to the absence of monthly data for that period, it is difficult to analyze any second-round effects on other components of the CPI basket.

The report forecast domestic inflationary pressure to intensify during 2016, driven by second-round effects stemming from rise in energy prices. It said “higher energy and transport costs for other businesses should lead to higher prices for consumer goods, which will put pressure on other components of the CPI basket.”

Further, the report said the government is likely to increase its monitoring of any unjustified rise in prices of basic foodstuffs and commodities. The Ministry of Commerce and Industry (MCI) currently carries out inspection rounds and takes legal procedures against any price violations or manipulative activities. According to the report, this is expected to intensify in order to ensure that prices remain stable.

This article was first published in the Saudi Gazette on Feb. 25, 2016.