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UAE Enters Deflation Territory

Prices for essential consumer goods and services decreased by 0.03 per cent in June compared to the same month last year, data from the Ministry of Economy showed on Monday.

A countrywide slump in housing rents and a decline in food prices were the main contributors to the fall.

From January to June of this year, the consumer price index fell by 2.7 per cent, due to a 5.8 per cent decline in housing costs and a 2 per cent slippage in food prices. Housing rents and food prices account for more than half of the consumer price index basket.

The negative inflation — or deflation — in June should bring welcome relief to consumers who bore the brunt of double-digit inflation in recent years. Inflation in the UAE hit a 20-year high of 12.3 per cent in 2008, after reaching 11.1 per cent in 2007.

However, Tarek Coury, an economist at the Dubai School of Government, warned that a deflationary environment would probably lead to cuts in salaries and wages.

“As prices fall, firms experience a profit squeeze that they pass on to their workers by lowering their money wages,” Coury said. “As far as the (employed) consumer is concerned, this may be a wash.”

Giyas Gokkent, the chief economist at National Abu Dhabi Bank, said that deflation “is symptomatic of the significant economic slowdown” in the country. Growth in the UAE economy has slowed to a crawl, and many private sector economists predict that the economy will shrink this year. Consumers have cut spending as firms have laid off employees and construction projects have been cancelled or postponed.

Prolonged deflation can inhibit economic recovery. Consumers may curtail their spending out of fears of reduced wages or postpone purchases in expectation of further price cuts, thus creating a vicious cycle of negative growth.

However, both economists see little chance of chronic deflation in the UAE. “I regard the current phenomenon of declining consumer price index as a temporary issue, just as double-digit inflation in the past few years was temporary,” Gokkent said. “It will start to rise, likely from 2010.”

The June deflation compared with year-to-year price increases of 0.8 per cent in May, 1.8 per cent in April, 4.5 per cent in March, 6.3 per cent in February and 7.3 per cent in January.

Nevertheless, prices for the first half of the year were 3.4 per cent higher than in the same period of 2008, the ministry data showed.

“The data are interesting because they appear to show some stabilization in consumer price index,” Gokkent said. He added 
that prices might 
decline further before recovering in 2010.

aruna@khaleejtimes.com