Qatar  | عربي

Download the PDF version of this weekly commentary in  عربي or  English

GCC inflation continues to remain in check thanks in part to lower international food prices, and should not act as a break on growth, according to QNB Group. Consumer Price Index (CPI) inflation in the GCC slowed to 2.5% in September 2013, from a peak of close to 3.0% in April 2013. Although GCC rental inflation continues to accelerate, lower international commodity prices have led to lower inflation in food and other components of the CPI. Other inflation (excluding rent and food) is slowing as weaker growth and softer hydrocarbon prices ease inflationary pressures. QNB Group expects inflation to pick up again in 2014 to around 3% as rents continue to rise, international food prices stabilize and heavy public investment drives up inflationary pressures.

 GCC CPI Inflation (Jan-12 to Sep-13)

(% change year-on-year, overall is weighted by GDP)


GCC Inflation

Source: Global Insight, IMF and QNB Group analysis

Housing costs (mainly rents) account for 27% of the CPI basket in the GCC and food prices for 20%. These items tend to be relatively volatile and, therefore, account for most of the change in the direction of inflation. GCC average annual house price inflation was only 0.6% in 2012, but accelerated to 3.2% in the year to September 2013. In Qatar, housing costs rose 6.1% over the same period.

While rising rents continue to push up inflation across the GCC, this has been more than offset by falling food prices. Good harvests around the world have led to high stockpiles of food and have resulted in declining international food prices. The World Bank’s food price index has fallen 13.3% so far this year on an annualized basis. As the GCC utilizes food imports for the bulk of its food needs, softening international food prices feed directly into lower inflation. Food inflation in the GCC peaked at an annual increase of 5.0% in July 2013, but slowed to 3.9% in September.

Other GCC inflation (excluding rent and food) slowed from 3.1% in the year to December 2012 to 1.6% in the year to September 2013. This is another major factor that is weakening regional prices. Other inflation (around 53% of the GCC CPI basket) mainly comprises transport, communications, education, clothing, furniture and health services. A broad economic slowdown is expected in the GCC in 2013 as increases in oil production are scaled back. Along with lower international oil prices (down around 2% in the year to September), this is leading to weaker demand and an easing of inflationary pressures in the GCC.

The inflation picture is mixed across the GCC. In Qatar, Oman and Saudi Arabia, inflation is slowing across all components. Meanwhile in Bahrain, Kuwait and UAE, inflation is flat or rising slightly as a recovery in real estate prices, particularly in Dubai, is stronger than the decline in food prices.

There is scope for GCC inflation to slow further later this year with falling international food prices. However, QNB Group expects that downward pressures on prices are mainly short term. International food and other commodity prices are likely to stabilize in the next few months, assuming more normal global harvests and a pickup in global economic activity.

Meanwhile, domestic inflationary pressures are likely to intensify. A number of GCC countries, particularly Saudi Arabia and Qatar, plan heavy investments in major projects in 2014. This is likely to accelerate economic growth, which could lead to supply bottlenecks pushing up prices. Strong inflows of expatriates are needed to work on projects, which is likely to sustain rent inflation and increase demand pressures throughout the domestic economy.

Overall, QNB Group expects GCC inflation to pick up to around 3% in 2014. However, this is far from the double-digit inflation experienced in 2007-08, which was partly driven by higher international food and fuel prices. GCC inflation is therefore likely to remain well in check and will not put a break on higher economic growth in the region.


Follow Us