x Abu Dhabi, UAEFriday 21 July 2017

Inflation worsens as costs rise

Data from the National Bureau of Statistics shows higher education and food costs contributed to inflation reaching a 16-month high in September.

A weakening dollar has led to higher prices for the country’s importers.
A weakening dollar has led to higher prices for the country’s importers.

Higher education and food costs contributed to inflation reaching a 16-month high in September.

Consumer prices rose 1.2 per cent in September compared with the same month last year, according to data from the National Bureau of Statistics yesterday.

Prices rose 0.9 per cent in September compared with August.

Education costs increased by the highest amount within the basket of consumer goods and services used to calculate the headline consumer price index.

The cost of educating children rose by 3.6 per cent last month on an annual basis. With many children returning to school for the start of the academic year, parents are often required to make annual payments for school fees during September.

"In a period in which salaries have come down, education costs have gone up by a large amount and that's a drag on consumer spending," said Mark McFarland, the emerging markets economist at Emirates NBD.

Food and soft drink costs edged 2.7 per cent higher on an annual basis as the impact of steeper global food prices was exacerbated by increased demand for products during the holy month of Ramadan.

Recreation and culture and transport were other expenditure groups where prices rose.

Inflation is slowly edging higher this year after the global financial crisis dragged demand for consumer goods and services lower.

The steady winding up of inflation in recent months follows a period of deflationary pressures on the economy due to declines within the housing sector, one of the biggest representatives within the index along with food.

Rises in global food prices have buffeted the UAE in recent months. As it imports around 85 per cent of its food, the country is particularly vulnerable to pricing pressures.

Vegetables, fruits, fish, mineral water and soft drinks, and sugar products were the food groups with the biggest price rises in September compared with August.

Concerns have increased globally about supplies of vital food staples in recent months as consumer demand builds after the downturn. Exacerbating supply pressures have been worse than expected due to bad weather conditions in Pakistan, the US, Russia, Canada and Europe.

"Growth is beginning to pick up again and the strength of global commodity prices have risen but we are a long way from facing the kinds of inflationary problems of 2007 and 2008," said Simon Williams, the chief economist for the MENA region at HSBC.

Inflation reached double-digit levels in the years prior to the financial crisis, fuelled by an asset price bubble, particularly in the property sector.

The upward pricing pressure from housing remains largely absent now with the sector, particularly in Dubai, still in recovery mode from the crisis.

Housing rose by the smaller degree of 0.16 per cent on an annual basis. Economists said the slight rise reflected some of the continuing spare capacity in the Dubai property market.

The Central Bank's ability to adjust monetary policy tools to control inflation is limited. The dirham's peg to the US dollar means the regulator's actions have to closely follow the US Federal Reserve.

As the US maintains low interest rates to help stimulate its economy, persisting with similar measures in the UAE if growth picks up faster may run the risk of further stoking inflation.

The greenback's weakening in recent months has already contributed to higher prices for UAE importers.

tarnold@thenational.ae