x Abu Dhabi, UAEFriday 28 July 2017

Strong US dollar helps slow inflation

Prices of some basic food supplies have dipped in recent weeks, signalling that the rate of price increases has finally slowed.

There is a silver lining to all the gloomy economic news, with inflation showing signs of easing, economists say. Prices of some basic foodstuffs have dipped in recent weeks, signalling that the rate of price increases has finally slowed. "It's very likely that inflation in the third quarter has reached zero," said Fabio Scacciavillani, an economist at the Dubai International Financial Centre. The decrease in transportation costs had helped to reduce inflationary pressures, said Mohammed Ahmed bin Abdul Aziz al Shihhi, the Undersecretary to the Minister of Economy. "There are indications that inflation will be curbed," he said.

Inflation across the Gulf had climbed into double-digit figures as recently as a few months ago. The UAE was coping with 11.1 per cent inflation and Qatar endured price increases of about 14 per cent last year, both the highest in two decades. The moderation of the prices surge comes as many of the factors driving costs up have reversed. The dollar, which was forcing up import prices in the Gulf as it fell, has been rising in recent weeks. Commodity prices are plummeting.

Commodity prices in the global markets have generally declined since late August. The price of rice declined almost 34 per cent at the end of last week, from its peak in September. In the meantime, the dollar, to which the dirham and most GCC currencies are pegged, has recovered remarkably after reaching its low point against the euro in April and July. It has since rebounded almost 30 per cent, dragging the dirham with it.

The decline in food prices and the appreciation of the dollar are significant in reducing inflationary pressures because the UAE sells oil in dollars and pays for most food imports in euros. The decline of petroleum prices has also reduced the cost of delivery. Abraham George, the purchasing manager at the Bani Yas Co-operative Society, said diary products had declined about 10 per cent since last month and premium rice was down more than 15 per cent. The wholesale price of Basmati Tilda rice, for example, has declined to Dh235 (US$63.97) per 20kg, from Dh280 last month.

"We are definitely past the worst and you'll see prices not fall, but certainly inflation moderate substantially over the next 12 months," said Simon Williams, the chief economist at HSBC. "Prices at the start of [the third quarter] plateaued and then started to moderate and I think the trend will become more pronounced in the coming 12 months." The UAE does not report inflation figures regularly, but GCC countries that do are already showing that price increases have hit the brakes.

Saudi Arabia, for instance, reported last week that September inflation had slowed to 10.35 per cent from 10.8. "We are already seeing signs of inflation slowing down in countries that provide regular data," Mr Scacciavillani said. Mr Williams expects the anticipated economic slowdown to lift the internal inflationary pressure. Rapid economic growth and a consequently significant jump in market demand in the past five years has put increased pressure on the production and delivery of goods and services and thus pushed up inflation.

In recent weeks, economic activity has shown signs of a slowdown with layoffs of employees, tightening of credit, a reduction in private-sector projects and a decline in property values in Dubai. Slowing economic activity and an expected drop in consumer demand will deliver some respite for the existing infrastructure and allow all of the region's economies to cope with their recent growth. "The capacity was very clearly under strain and I think all those things coming under a slowdown would be a chance for the economy to catch up with the growth of demand in the past three or four years," Mr Williams said.

He expects GCC inflation to dip to single-digits next year when the effects of the external factors spread to the economy and, internally, economies hit the brakes after half a decade of speeding ahead at full throttle. One of the main questions, however, remains the direction of rental prices, the principal factor driving up inflation in the UAE last year and this year. The rental market remains particularly tight in Abu Dhabi and only slightly better in Dubai. Mr Williams said rents would go down only if there were a significant slowing of the economy.

mjalili@thenational.ae