Price controls will help keep inflation in check for the rest of the year, say economists.
UAE pact on price controls set to last to end of the year
Price controls on essential food and other key household items are expected to help to keep inflation in check for the remainder of the year, say economists.
Escalating food prices have been one of the few drivers of inflationary pressures so far this year.
"If these measures are successful, they should help to keep inflation low," said Liz Martins, the senior economist of the Middle East and North Africa region at HSBC. "It is taking the pain of rising prices away from consumers to retailers."
As many as 400 commodities at 70 retail outlets across the country will have their prices fixed until the end of the year as part of the Ministry of Economy's agreement with retailers.
The action will appease consumers who would be forgiven for feeling that the overall inflation rate has not been reflecting how much they are paying for their weekly food shopping.
Inflation last month slowed for the fourth consecutive month to an annualised rate of 1.1 per cent, data from the National Bureau of Statistics showed.
The overall rate contrasts sharply with the view from the supermarket aisle, where the cost of basic foodstuffs continues to soar. Food and beverage costs rose 5 per cent last month from April last year. The reason for the difference is because the biggest contributors to the basket, housing and utility costs, have continued to tumble. An oversupply and low demand for new properties is expected to remain a drag on the housing market this year.
In contrast, global food prices are expected to continue rising, which will in turn cause retailers' costs to increase at a time when prices are being fixed by the Government.
The Ministry of Economy has indicated that retailers participating in its price-fixing scheme would not receive any compensation from the Government.
Retailers "have taken this as an initiative to pay back profits to the community", said Mohammed al Shehhi, the Undersecretary of the Ministry of Economy. "The other vendors that have not participated yet will have to react."
How the scheme will affect retailers' profits is as yet unknown, with analysts divided on the consequences.
"Import costs have been rising for many retailers because of the dollar's weakness against the euro and other currencies," said Raza Agha, the Middle East economist at the Royal Bank of Scotland. "The retail sector is a significant chunk of the UAE private sector and this step could dent its recovery."
Despite rising costs, other analysts do not expect the Government's campaign to hurt the profits of the major supermarkets as they are likely to increase the price of other goods to make up for the fixed price of basic foods.
"All companies are profit maximising and they do their best to reach a price that they think the market can take," said Richard Adams, a retail analyst at Verdict Research.
Food costs are near record peaks as producers hit by bad harvests struggle to meet growing demand from China, India and other emerging markets.
Talks between the Ministry of Economy and retailers about the possibility of regulating prices first began in March, when prices were even higher.
Forecasts received by the Ministry that commodity prices would continue rising until 2015 added extra impetus to the plans.
The Ministry denies its latest action is in any way a response to the unrest across the region.
Other governments from Egypt to Tunisia have taken measures to protect their citizens from rising prices after anger about rising inflation emerged as one of several triggers of social unrest. Many governments have had to dip into public finances to raise subsidies to offset higher prices of staples such as rice and bread.