Why does inflation continue to rise in the UAE?
The annual inflation in the UAE climbed to 1.9 per cent in March from 1.8 per cent in February, the highest level since October 2010, according to the data released by National Bureau of Statistics on Wednesday.
Inflation statistics for Dubai showed the consumer price in the emirate was 3 per cent in March. On a month-on-month basis, Dubai’s inflation declined -0.4 per cent in March from 3.4 per cent in February. For the first quarter of 2014, inflation rate in Dubai rose to 2.59 per cent compared to 0.13 per cent in the same period of 2013.
Housing cost was the key driver of consumer inflation in the UAE. At the national level, housing and utility costs, which account for over 39 per cent of consumer expenses, rose 2.4 per cent from a year earlier in March. Food and soft drink prices, representing nearly 14 per cent of the basket, increased 2 per cent.
“Rising inflation in Dubai and at the national level is to be expected through the course of this year, as the sharp increase in housing costs over the last couple of years feeds through to the official inflation indices. Nevertheless, we note that overall inflation is still relatively low: less than 2 per cent at the national level and 3 per cent in Dubai,” said Khatija Haque, Head of Middle East and North Africa Research at Emirates NBD.
In Dubai, housing and utility costs, which account for almost 44 per cent of consumer expenses, were up 4.8 per cent year-on-year and rose 0.4 per cent month-on-month in March.
Food and beverage prices, which account for 11 per cent of the basket, also rose 4.8 per cent from a year earlier and gained 1.2 per cent from a month earlier.
"Inflation has risen for 11 of the past 12 months, but the upward trend is accelerating. I don’t expect policymakers to take steps to moderate the pace at which the economy is growing, and as a result I expect consumer prices to rise even faster over the remainder of this year and into 2015,” said Simon Williams, Chief Economist, HSBC Middle East.
Analysts said at the current level of economic growth the country is bound to have higher inflation. “The UAE economy is on a strong rebound with construction activity picking up. Going forward, we expect rising demand to drive input prices. With the growth momentum in the economy picking up, 4 to 5 per cent inflation is sustainable,” said Shailesh Dash, Chief Executive Officer of Al Masah Capital.
Analysts said competitive pressures in the market are still limiting the pass-through of higher input costs (such as salary and wage costs) to consumers.
PMI data for the first quarter shows input prices rising substantially faster than output prices. “This suggests that, for the time being at least, inflationary pressures remain contained. However, we expect that as demand continues to strengthen, producers of goods and services will be able to pass on higher input costs to end-users, contributing to overall consumer inflation,” said Haque.
By Babu Das Augustine, Sarah Algethami
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