Much slower inflation in 2009
NBK’s latest Inflation Brief stated: With the 2009 numbers finally in, Consumer Price Index (CPI) inflation averaged 4.0% last year. In 2008, inflation was 10.6% and a major problem. Last year’s deceleration was no surprise, as pricing power faded quickly both in the world economy and in Kuwait after the financial crisis hit in late 2008.
The deceleration is even more dramatic if one considers monthly numbers. On a y/y basis, December 2009 prices were up only 2.1%. That measure had hit a record high of 11.6% back in August 2008. We expect that CPI inflation will stabilize near current levels to average 3-4.0% for 2010.
Looking back, one sees that inflation actually peaked a little before the financial crisis, and as economic growth was already moderating. At the time, the focus was largely on the housing/rent and food components of CPI. Both were rising at a very fast clip. Both accelerated thanks to the booming economy, but rents were exacerbated by short supply in the local market. Food prices were rising worldwide.
In Kuwait, housing costs and rents were rather quick to stabilize and the overall inflation rate followed suit (Chart 1). From a high of 16%, rent inflation was running close to 3% in December 2009, where it could be stabilizing.
Consumer price index & inflation in Kuwait
Food price inflation (Chart 2), which peaked at 14.2% y/y in June 2008, fell to under 2.0% in 2H2009. In December 2009 however, food prices took a big jump of 3.5% (m/m). We do not expect that rise to recur in coming months, though food prices could firm up somewhat. The December jump was led by the cost of food at restaurants (up 15.8% in one month) and higher prices for some market items (fresh chicken, wheat, vegetables). Some of these year-end increases may be seasonal and/or specific to calendar effects (many menu changes in December?).
Another interesting feature of the data is the dramatic slowdown in transportation (including auto, Chart 3) prices. We know that all or most prices were pressured in the difficult 2009 environment. Airline fares and car prices fell that year. Car prices were actually lower y/y for every single month of 2009 and finished in December at -5.3% (y/y), attesting to the tough sales environment in 2009 for big-ticket items. As an aside, lower car prices had probably little to do with foreign exchange effects. The lower USD in 2009 made US cars cheaper, but a higher JPY made Japanese cars more expensive (and the EUR was flat).
The NBK report concluded: No CPI numbers are available yet for 2010, but as stated above, the improved macroeconomic environment (NBK expects real GDP growth of 3.0%) should stabilize the inflation rate near 3-4%, without putting undue pressure on the upside.