Kuwait inflation to rise further after hitting a record 10.1%in February
In its latest economic brief, National Bank of Kuwait (NBK) reports that inflationary pressures continue to mount in Kuwait as the February consumer price index (CPI) jumped 10.1% from a year ago driven by escalating housing and food prices. The latest CPI data published on the Central Bank of Kuwait’s web site shows inflation reaching its highest recorded rate in recent history and surpassing the rate of 9.4% posted in July 1982. Kuwait now joins Saudi Arabia, Qatar and the UAE (forecasted) as the other Gulf States with double digit inflation. Over time, inflation significantly reduces the purchasing power of consumers. For example, at the current rate of 10 percent, the purchasing power of the Kuwaiti dinar is cut in half every seven years.
Consumer price inflation in Kuwait (% yoy)
According to NBK, after hitting a low of 1.4% in April 2006, Kuwaiti inflation has risen almost continuously over the past two years. The rate of increase in inflation over the past six months has been particularly rapid, having more than doubled from 4.8% since August 2007.
Housing, food and household goods and services accounted for approximately 77% of inflation’s overall rise in the past year. Housing and food have been the major culprits for the recent acceleration in inflation. Housing costs, which have the largest weight in the overall index (27%), have risen 16.1% over the past year while food costs (18.3% weight) rose 9.2%. Core inflation (excluding housing and food) had diverged from the trend in overall inflation during the second half of 2007 staying around 4.5% before jumping to 7.2% in January and 7.7% in February. Prior to that, core inflation had closely matched much of the rise in the overall rate since 2005.
Housing & food inflation in Kuwait (% yoy)
Interestingly, despite the perception that the Gulf States (including Kuwait) are importing a good deal of their inflation, Kuwaiti inflation at the wholesale level has been higher for locally produced goods. In December 2007 (latest figures available), wholesale inflation was running 6.6% and 5.8% for locally produced and imported goods, respectively. The Kuwaiti dinar’s 9% appreciation against the US dollar since May 2007 might have played a role in limiting the impact of rising import prices. In May 2007, Kuwait depegged its currency from the dollar and reverted back to a currency basket regime in which the dollar still holds a predominant weight. Though the central bank does not divulge the components of the basket, notr their weights, the dollar is estimated to represent roughly 80% of the basket.
NBK expects inflationary pressures to continue rising from a number of different sources over the next few months. First, housing costs have started ratcheting upwards about a year ago prior to which their component was adjusted infrequently. Indeed, even now, the housing component is adjusted once every three months, the last time being in December 2007. Thus, the March 2008 figure is expected to show a considerable rise. Second, food inflation continues rising globally. After rising 15.2% in 2007 (measured in US dollar terms), the IMF expects world food prices to rise 18.2% in 2008 before easing sometime next year.
Monetary authorities have made containing inflation one of their top priorities. After depegging the KD from the US dollar in May 2007, the Central Bank has passed a number of important measures to slowdown credit growth. However, there are limits to what monetary policy alone can do in such a fast growing economy fuelled by high oil prices and expanding government spending. The large weight that the US dollar commands in the basket against which the KD is pegged also limits how far Kuwait’s interest rates may diverge from US dollar rates that appear unlikely to rise soon.
Furthermore, direct price controls that are being considered to contain inflation may work in the short-run but not in the long-run. Therefore, as the IMF has recently noted, the burden of further measures to contain inflation may well have to fall on fiscal policy. Restraining the growth rate in overall spending will be necessary to manage growth in domestic demand. However, even the room for fiscal policy is limited given the need for higher investment to alleviate supply bottlenecks over the long run. Therefore, tolerating somewhat higher inflation for a while will be unavoidable, while subsidies, price controls, reduction in tariffs and other regulatory measures being considered by the government could –at least in the short run- alleviate the impact of higher prices on the purchasing power of consumers.