Abu Dhabi inflation up 4.95% in June on housing, utility costs

Abu Dhabi - A strong UAE dirham helps imports and reduces imported inflation but can affect trade competitiveness by making exports more expensive, says the research note.

The month-to-month consumer goods prices in Abu Dhabi went up 1.1 per cent in June on rising housing and utility costs, according to data issued by the Statistics Centre Abu Dhabi, or Scad.
"The Consumer Price Index (CPI) increased 1.1 per cent month-on-month in June and rose 4.95 per cent on a year-on-year basis," says Alp Eke, a senior economist at the National Bank Abu Dhabi (NBAD).
The groups which experienced increases in prices during June 2015 compared with the preceding month were housing, water, electricity, gas and other fuels with a two per cent increase, while food and beverages registered a 1.2 per cent increase in June, said the Scad.
Wisaal Ahmed Khan, chief executive officer of Alam Supermarkets, an Abu Dhabi-based retail chain, said the prices of sugar, wheat, rice and edible oil are stable in international markets, ruling out any rise in the prices of commodities that are an integral part of the UAE food basket.
"There is some problem with vegetables as the supply chain has been disturbed due to the law and order situation in the Middle East," he said.
Real Effective Exchange Rate, or REER, is the weighted average of a country's currency relative to an index or basket of other major currencies adjusted for the effects of inflation.
For the UAE, the REER (Dh) is currently at 120, which shows the currency is over-valued 20 per cent and needs to correct to approach its fair value of 100, says an NBAD economic research note.
A strong UAE dirham helps imports and reduces imported inflation but can affect trade competitiveness by making exports more expensive, says the research note. Since the UAE is an import-based economy and the main item for exports are hydro-carbons, it is good for the economy to have the currency a bit over-valued.
"In June, housing and utilities category increased by two per cent month-on-month basis and surged 6.7 per cent on year-on-year basis," Eke said.
The housing and utilities combined with the food category constitute nearly 55 per cent of a household budget.
According to CPI, rents have been increasing since September 2013, but Eke expected a definite slowdown. Most recent trends in the market indicate that sales prices and rents are declining.
According to the Urban Planning Council, utility charges in the emirate of Abu Dhabi have been subsidised. The electricity subsidy in residential buildings ranges from 55 to 90 per cent and the water subsidy ranges from 79 to 100 per cent.
Utility charges have started increasing since the new tariff was announced in November 2014 in a move to minimise government subsidies.
The 'food and beverages' category increased by 1.2 per cent month-to-month in May and 2.54 per cent year-on-year, as per SCAD data.
Eke said the UAE dirham "is around 20 per cent over-valued with respect to main trading partners." In the future, imported inflation components are expected to decline further, he added.
"Rents have started to slow down as well, and even though it will take time - maybe five to six months - to be reflected in the CPI, further reductions in the housing category are expected," he said.
In 2015, CPI annual average is expected to increase by around 4.5 per cent year-on-year, the senior NBAD economist said.
In June, the International Monetary Fund forecast the UAE inflation to reach 3.8 per cent on average in 2015.
- haseeb@khaleejtimes.com