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Saudi Arabia sees surprising drop in monthly food prices


Foodstuffs, which account for 21.7 per cent of the CPI basket, saw prices rise by 2.8 per cent year-on-year in June. - Bloomberg file picture

Muscat: Saudi Arabia's inflation rate remained unchanged at 2.7 per cent, year-on-year, for the third consecutive month in June, according to the Central Department of Statistics and Information (CDSI).

Foodstuffs and housing and related services remain the main sources of inflation despite a surprising month-on-month decline in food prices, as core inflation stabilised in June for the second consecutive month. CDSI estimate of core inflation, which excludes food and rent and other housing services, remained flat at 2.1 per cent year-on-year for the second consecutive month in June. Core inflation was mainly driven by a seasonal increase in the home furniture segment during the summer months (4.9 percent year-on-year), which carries a 9.1 per cent weight in the CPI basket.

Foodstuffs, which account for 21.7 per cent of the CPI basket, saw prices rise by 2.8 per cent year-on-year in June, adding 0.67 percentage point (pp) to the headline figure. At this level, food index recorded the lowest annual increase since April 2010.

This was mainly due to a drop in the monthly food inflation which broke last month's flat trend and declined, surprisingly, by 0.2 per cent compared with May's print. The monthly print is thus on the low side of the five-year average.

The report notes that this monthly drop in food prices is not in line with seasonal factors that usually push food prices upward ahead of Ramadan. The decline in food prices also came against our expectation of higher prices in June on the back of accelerating wholesale food prices in the previous two months.

The drop in food prices may however reflect the government's attempts to supervise unjustifiable increase in prices during Ramadan as well as the downward trend in international food prices. According to the UN Food and Agriculture Organisation, year-on-year global food price inflation remained in a deflationary mood for the last twelve months.

Partially offsetting the impact of lower food price inflation was a rebound in rental inflation. It climbed back over four per cent in June. The increase in this group is being driven by the rent component, which increased 4.6 per cent year-on-year in June, compared with 4.2 per cent in May. CDSI analyst think that higher demand during the summer months is putting upward pressure on rents at a time when government initiatives to reform the housing market are still to affect the rental market.

Annual inflation for transport remained in the negative territory, though its monthly increase was one of the highest among all other subgroups of the CPI basket. In contrast, inflation for other components of the cost of living index, that are generally driven by consumer demand (clothing and footwear, recreation and culture, education and restaurants and hotels), has stabilised or fallen slightly in the past few months.

Looking ahead, CDSI expects inflation in the second half of the year to gradually increase compared with the first half. While food inflation is likely to be more affected by international prices and USD exchange rate vis-à-vis other Saudi trading partners' currencies, we expect the rent and housing services price index to stay the course at around the current level with only a slight increase, as witnessed through the previous year.

Such steady but slow increase in the housing inflation rate is likely to be driven partially by a base effect and partially by strong domestic demand on housing units. In addition, while healthy growth of money supply and bank credit to the private sector (13.4 per cent and 12 per cent year-on-year in May, respectively) will fuel domestic liquidity market, we do not expect the monetary authorities to take any policy rate action, especially given the evident stabilisation in core inflation. We expect the average 2014 inflation to register three per cent year-on-year.

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