Not bad: GCC trumps world and MENA in inflation stakes
The GCC region witnessed a moderate 3.0 percent inflation in consumer prices during 2012, down from 3.7 percent in 2011, according to QNB Group analysis. This is relatively low when compared to the global average inflation of 4.0 percent and the MENA region's 10.4 percent, according to IMF estimates. It was the fourth consecutive year that the GCC prices rose at only a moderate rate, following a period of higher inflation that peaked at 11.2 percent in 2008.
The three most heavily weighted price categories in the consumer price indices (CPIs) across the region are housing costs, food & beverages and transport & communications. These categories represent two-thirds of the CPI basket in the GCC and rose by 3.0 percent, 4.5 percent and 1.5 percent, respectively, in 2012. Prices of other goods and services rose on average by 2.7 percent.
Whereas devaluing currencies are an important driver of inflation in many MENA countries, the pegged exchange rate system in the GCC contributes to price stability. Subsidies, particularly on fuel, also shelter the GCC from a significant driver of inflation in some other MENA countries.
The spike in GCC inflation in 2008 was largely driven by bottlenecks in supply, particularly of housing, during a period of high inflows of expatriate workers and economic growth, as well as high global food prices. However, over the last four years growth in rents has been much lower as most GCC housing markets have corrected. Indeed, three countries (Qatar, Bahrain and UAE) actually saw deflation in housing costs in 2012, for at least the third year in a row. Total regional housing costs have only continued to rise because of high housing inflation in Saudi Arabia, up 8.1 percent in 2012, where there is a housing shortage.
Food remains one of the leading drivers of inflation in most of the GCC countries. However, food inflation has been considerably more moderate than in 2008, despite another global food price spike during the summer of 2012. This may be due in part to efforts since 2008 to diversify GCC food supplies, driven by food security concerns. Although these efforts are at an early stage they may have gone some way to securing a more stable food supply.
QNB Group's calculation of regional inflation utilizes the full year inflation data, which has recently become available for all six GCC countries, weighted by estimated GDP. An alternative methodology for calculating regional inflation would be to weight the inflation rates according to population, to express the inflation experienced by an average resident in the GCC. This would give a slightly higher figure of 3.5 percent, as it would be skewed towards the Saudi rate on account of its larger population relative to the smaller GCC countries.
Bahrain, Kuwait and Oman all had inflation that was close to the regional average. The UAE and Qatar had lower inflation, of 0.7 percent and 1.9 percent respectively, which offset the higher 4.5 percent inflation in Saudi Arabia. These three countries deviated from the regional average mainly due to falling housing costs. Across other categories of the CPI, such as transport & communications, inflation was broadly similar across the region.
In Qatar, a significant development in recent months has been a return to housing inflation after four years of deflation. Although housing costs did decline substantially in the first half of the year, contributing to an average 3.3 percent fall over the whole year, there was a return to growth in rents in the second half. By December 2012, year-on-year housing costs were actually up 2.8 percent. This uptick seems to be largely related to fresh inflows of expatriate workers to implement the country's major infrastructure projects. It suggests that 2013 will see modest housing inflation in Qatar, of about 3.7 percent.
The UAE hasn't seen a similar uptick yet, but housing costs do seem to be close to bottoming out and could also turn positive in 2013. On a regional basis, these trends should be offset by an easing in Saudi housing inflation, as a major national housebuilding program begins to address the supply constraints. Overall, QNB group expects GCC inflation to remain steady at around 3.3 percent in 2013.
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