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Inflation Returns: Up 0.3pc in July

Average inflation for the first seven months of 2009 edged higher to 3.0 per cent from the same period last year

DUBAI — Retail prices in the UAE crept upward at an annual rate of 0.3 per cent in July, the Ministry of Economy said on Thusday, signalling a return of mild inflation just one month after the country experienced its first overall decline in consumer prices since 1990.

Prices for alcohol, education, hotels and restaurants, and transportation rose the fastest of all the categories surveyed, data published on the ministry’s Web site showed.

The overall increase followed a 0.3 per cent decrease in prices in June. While that month was unusual for its negative inflation, or deflation, the countrywide slump in housing rents that contributed to June’s decrease continued to weigh on results for July. Housing, fuel, light and water together slipped by an annual 1.3 per cent from the same month in 2008.

“Broadly, rents as measured by (the ministry’s) data have not fallen as much as one would have been led to believe from real estate agencies’ data, hence the decline in inflation has been more constrained than could have occurred,” said Giyas Gokkent, Chief Economist of National Bank of Abu Dhabi.

Falling prices for food and beverages — another cause of June’s deflation — were a factor again in July. Food and beverage prices slid by 1.3 per cent last month.

Average inflation for the first seven months of this year edged higher to 3.0 per cent from the same period of 2008, the data showed. Inflation for the six months of January to June was marginally lower at 2.7 per cent.

Inflation among Gulf Cooperation Council member states has cooled dramatically in recent months as prices for oil and other commodities have plunged. Oil prices — the key determinant of economic growth for the UAE and many of its neighbours — have more than halved from a high of $147.27 a barrel in July last year.

Inflation in the UAE hit a 20-year high of 12.3 per cent in 2008, after reaching 11.1 per cent in 2007.

High rates of inflation are a scourge for almost any economy. In extreme cases, hyperinflation — as suffered by Germany in the early 1920s and by Brazil and Argentina in the early 1980s — can wipe out savings, impoverish populations and threaten economic collapse.

But while governments seek to reduce inflation, deflation can create problems of its own. When prices fall too quickly and for too long, companies and consumers defer investments, sometimes causing profits and wages to erode in a withering downward cycle.

EFG Hermes argued in an investor note on Thursday that continuing reductions in rents in Dubai and Abu Dhabi would help push inflation lower and into negative territory for the year. The investment bank forecast that the UAE would experience deflation of 5.3 per cent for 2009.

It estimated that rents would stop falling so fast next year and predicted “a positive but weak inflation rate of 1.5 per cent” in 2010.

· bruce@khaleejtimes.com

· With inputs from Agencies