inflation has accelerated thus far in 2007, reaching 5.3% in may… recent cbk policy action has focused on subduing rising prices

  inflation has accelerated thus far in 2007, reaching 5.3% in may… recent cbk policy action has focused on subduing rising prices
In its latest economic brief, National Bank of Kuwait (NBK) reports that since the start of the recent oil windfall, the economic performance of GCC countries has been impressive almost across the board, including record growth rates, significant budget and current account surpluses, and sizable foreign assets accumulation. Yet, these achievements came in tandem with inflationary pressures that started to mount, especially over the last two years. Factors causing higher inflation in GCC countries vary from country to country. For example, in Qatar and UAE, rising rent is being blamed, while in Saudi Arabia it was mainly inflation in foodstuffs. Furthermore, the magnitude of inflation varies considerably among GCC members, ranging in 2006 between 2.1% in Bahrain and 11.8% in Qatar.
In Kuwait, the latest data released by the Ministry of Planning shows that consumer price inflation has accelerated during 2007 after having declined to 3% in 2006 from its record high of 4.1% in 2005. Inflation ended the month of May at 5.3% year-on-year, slightly below the all time high of 5.4% registered in the previous month. Inflation rates during the last three months were the highest in the revised consumer price index going back to 2000. Accordingly, inflation during the first five months of 2007 averaged 4.8% relative to the corresponding period of previous year and 3.4% above 2006 average.
According to the Central Bank of Kuwait (CBK), the depreciation of the KD against major non-dollar currencies has been a key factor behind rising inflation, as prices of imports have risen. In a move to contain these inflationary pressures, and given the expectation of further weakening of the US dollar, the CBK abandoned the dinar’s peg to the US dollar on May 20 of 2007, switching back to the regime in place before 2003. This policy change has allowed the CBK to revalue the KD since then by as much as 2.5% against the US dollar, though its impact on inflation is not yet apparent.
NBK noted that since the adoption of the KD peg against the US dollar in January 2003 through the end March 2007, the KD lost 17% and 14% of its value against the euro and the sterling pound respectively, though it appreciated by 2.5% against the Japanese yen. During this same period, its value against the US dollar rose by only 3.5%. While the precise inflationary impact of such movements in the exchange rate depend on several factors, including the degree of import substitution between Kuwait’s various trading partners and on the extent that exporters have reduced their profit margins to maintain their market share in Kuwait, there is no doubt that the large change in the KD’s value in such a short span of time has had a notable impact on import prices for Kuwait.
While exchange rate changes are likely to have been a large contributor to inflation, other domestic factors are expected to have played a role as well. One such factor is the large increase in private consumption in recent years, having grown by an average of 11.1% per annum since the end of 2004 in comparison with 6.8% over the previous two years. Strong growth in personal lending, which rose by 23.2% and 17.8% over the last two years, respectively, which by far exceeds the average growth of the non-oil sector during the same period, can be seen as a factor fueling consumption and, thus, inflation. Rising public sector wages in recent years, as well as increasing transfers to households including the two Amiri grants, are also factors. Meanwhile, the generous government subsidies of a number of consumer commodities and services is likely to be understating the problem of inflation as subsidized products in the consumer price index have seen little or no rise in recent years.
According to NBK, inflation data reveals that foodstuff were the major contributor to consumer price inflation in Kuwait over the last two years. After having fallen to 3.9% in 2006 from its record of 8.6% in the previous year, average inflation of food accelerated again to 5.6% in May 2007, averaging 5.7% during the first five months of 2007. Food prices alone were responsible for almost one third of the recorded consumer price inflation during the last two years, and for 22% of the general increase in prices during the first five months of 2007. April and May 2007 saw some easing in the price rise.
Higher inflation in foodstuffs appears to be a global phenomenon in recent years. The International Monetary Fund (IMF) estimates that average world food prices rose by 14.3% in 2004 and by 9.9% in 2006. Such above average inflation is bound to find its way into Kuwait, especially as Kuwait imports the bulk of its foodstuffs, though the weakening dollar no doubt also played a role.
Other goods and services–mainly recreational and personal care–were the second major contributor to consumer price inflation, and responsible, on average, for 17.8% of the increase in prices during 2005 and 2006, though a smaller 9% of the inflation rate in the first five months of 2007.
Household goods and services, such as textiles, appliances, furniture, and household domestic services were also subject to significant price increases in recent years. Inflation in household goods and services averaged 3.2% per annum over the last two years, and 3.3% during the five months of 2007. Hence, this group contributed 13.1% and 10.2% to consumer price inflation recorded in the previous two years and during the five months of 2007, respectively. The rise in this group may reflect both higher import prices in light of rising oil and metal prices globally, and the indirect effect of increased rental rates in Kuwait.  The IMF estimated metals’ prices increasing by 26.4% in 2005 and 56.5% in 2006 globally.
Also according to NBK, clothing & footwear, housing services (mostly housing rent), and transport & communications all saw notable price increases, and contributed 12.9%, 12% and 6.2% to cumulative consumer price inflation in 2005 and 2006 combined, respectively. Yet, the transport & communications sector was the leading source of inflation in 2007, responsible for 31.6% of the rise in prices during the five months of 2007. Such a development may be due to rising costs of imports of automobile and auto parts of European origin following the significant appreciation of the euro and sterling pound against the US dollar, as well as the rising costs of airline fares in tandem with rising oil prices, and the rising penetration rate of the communication sector. In contrast, inflation in transport & communication prices was relatively constant in the years since November of 2006. Meanwhile, rent prices were mainly affected by the rising demand on residential units following the significant growth in the population, and by the indirect effect of the surge in prices of construction materials.