UAE inflation continues to show little growth

24 October 2011

September inflation numbers show consumer prices up by just 0.1 per cent

Inflation in the UAE has fallen to just 0.1 per cent in September, according to the latest figures from the country’s National Bureau of Statistics.

The figures show that inflation dropped from 0.7 per cent the previous month. However, on a month-on-month basis, the consumer price index has reversed its deflationary trend. Between September and August, inflation rose by 0.4 per cent, while in the previous month it fell by 0.16 per cent.

The main cause of upward pressure on the inflation rate in the UAE is food, education costs, and alcoholic beverages and tobacco. Housing costs declined by 0.26 per cent. The UK’s Barclays Capital is predicting that full-year inflation in the UAE will be 1 per cent, only slightly higher than last year’s level of 0.9 per cent. “Food inflation is likely to remain the main driver behind UAE inflation in the coming months despite stabilising international food prices,” said the bank in a report published on 24 October.

Inflation in the UAE is now well below the GCC weighted average, which is about 4 per cent, according to Barclays Capital. It is driven by rising housing costs and utility costs. Barclays Capital estimates that core inflation, excluding food and housing, rose by about 1.4 per cent year-on-year in September, compared to 1.7 per cent year on year in August.

Low levels of inflation are a worrying sign that credit growth and private sector economic activity remain weak. Credit growth to the private sector was just 2.2 per cent in August, compared to the previous year.

Across the seven emirates of the UAE, inflation was generally subdued, with Umm al-Quwain reporting the highest inflation at 0.85 per cent. Inflation in Dubai and Abu Dhabi was lowest in the country at 0.35 and 0.39 per cent respectively.

The current level of inflation is a dramatic drop-off from a few years ago. It hit 11.1 per cent in 2007, the highest level of inflation seen in 20 years, largely driven by the UAE’s rapidly expanding housing bubble. Prices in Dubai and Abu Dhabi were particularly overheated at that time.

Both emirates are still struggling with oversupply in their housing markets leading to downward pressure on prices. Inflation has dropped significantly in the rest of the region since the financial crisis in 2008 burst the asset price bubble. In Qatar, inflation hit 16.6 per cent in 2008. Inflation in Qatar is currently 2.2 per cent, according to the latest figures from the Qatar Central Bank.

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