These results directly contradict the popular opinion that food price inflation is high and getting higher. There appears to be the expectation that hikes in the price of food and other grocery items will increase at a rate similar to that of other items, such as oil. Perhaps given the scarcity of price data in the UAE — especially from official sources — it is not surprising that this opinion is so widespread. What these results mean, therefore, is that the main contributors to an increase in household expenditure is not the price of food, and other non-food grocery items, but other types of expenditure such as transportation, rents, telecommunication, entertainment and education. Indirect taxes too are clearly having an impact.

To carry out the research, we compared the prices of the same items over a three-month period at a leading supermarket chain and at a hypermarket. We also have supporting data from other research companies for a 12-month period.

The results from the hypermarket were surprising. Between the middle of November last year and the end of January this year the total value of our shopping basket, comprising 69 items, actually fell by 0.6 per cent. There were however price increases on specific items and groups of items. The price of fruit and vegetables increased 3.9 per cent over the period, and our grouping of cleaning items and toiletries, including soap and toothpaste, increased by 2.2 per cent. However, these price rises were offset by a 4 per cent drop in the price of fish, chicken, and meat. When we compared the price of items at the supermarket, we used a more rigorous methodology, using bar codes to track prices. Prices were also tracked on the 12th of the month to reduce short-term promotional influences. Between November 12 and January 12 most of the items showed no change in price at all and some items even saw a price drop.

So much for being ripped off by the supermarkets then. As Spinney's CEO, Jannie Holtzhausen said: "Food price inflation in the UAE is, contrary to popular belief, quite low and in line with food price inflation in the rest of the world." The aim of a supermarket, he said, is to "make a profit at a reasonable margin". But as competition increases margins become finer. "We cannot afford to be charging prices out of line with competitors," he said.

REPORT IN DETAIL

Dubai is the 73rd most expensive city globally, out of 133, with Tokyo taking the top slot, according to the 2005 Cost of Living Survey carried out by the Economist Intelligence Unit.

Dubai is also ranked the sixth most expensive city in the Middle East after Beirut, Algiers, Abu Dhabi, Amman and Kuwait City.

These results are unlikely to come as a surprise to people living in Dubai, who have learnt quickly that it is no longer the "cheap" city it once was. Dubai's rising cost of living is hitting residents hard, if everyday comments are anything to go by. 

Recent inflation forecasts certainly indicate that day-to-day expenses are costing a great deal more than one year ago. According to some unofficial forecasts, inflation rose between 22 per cent and 30 per cent in 2005.

Recent oil price increases of 32 per cent, and similar increases in rents are well-documented, and major, contributors to the overall increase in the cost of living. On top of this, it is also widely believed that price hikes on everyday items, such as food and groceries, are steep and unjustifiable.

A study conducted last September by the Abu Dhabi Chamber of Commerce (ADCCI) shows how widely held this view is. It showed that 98 per cent of individuals believed that "the price of food was not reasonable, and that prices were constantly increasing."

Given the scarcity of price data in the UAE especially from official sources, making it impossible to establish a more accurate picture of inflation, it is not surprising that this opinion is so widespread.

There appears to be the expectation that hikes in the price of food and other grocery items will increase at a rate similar to that of other items, such as oil.

Last May, the manager of major retailer Union Co-operative, Marwan Al Thani, was reported to have said: "Prices of food and non-food items have risen, on average 10-15 per cent over the past two years."  To find out the true facts Khaleej Times carried out its own investigation to determine the contribution of food and other basic household grocery items to the overall rate of inflation and to form a better picture of what the real drivers of inflation are.

By so doing, the survey should also help consumers to analyse their household spending more accurately and to budget more easily. It also needs to be noted that our intention was to monitor the changes in price over designated periods, and not to compare absolute prices between retailers.

THE RESULTS

What we discovered would probably surprise most people. Contrary to popular opinion, food price inflation, as well as price increases on non-food grocery items, is really very low.

On most items, price increases were marginal, within the one or two-per cent range, and the price of some items even fell.

To carry out the research, we compared the prices of the same items over a three-month period at a leading supermarket chain and at a hypermarket. We also have supporting data from other research companies for a 12-month period.

For our own calculations we also used two different methodologies. At the hypermarket, we adopted a "ready-reckoner" approach, simply comparing a shopping basket containing 69 items, over a three-month period. We bought the same items or at least what we believed were the same items and compared their prices.

The advantage with this method is that it quite closely mirrors our normal pattern of expenditure. Unfortunately, however, it fails to take into account fluctuations caused by, for example, seasonality or promotional influences.

But even taking these issues into consideration, the results were astounding. Between the middle of November last year and the end of January this year the total value of our shopping basket actually fell by 0.6 per cent.

There were however price increases on specific items and groups of items. The price of fruit vegetables increased 3.9 per cent over the period, and our grouping of cleaning items and toiletries, including soap and toothpaste, increased by 2.2 per cent. However, these rises were offset by a 4 per cent drop in the price of fish, chicken and meat.  When we compared the price of items at the supermarket, we used a more rigorous methodology.  Since items were tracked according to bar codes, it was possible to compare the price of exactly the same item over any stated period.

This meant that any selected item always came from the same source and was subject to the same market influences, such freight charges and seasonality fluctuations. Prices were also tracked on the 12th of the month to reduce short-term promotional influences. 

Between November 12 and January 12 most of the items showed no change in price at all and some items even saw a price drop.

These results are backed up by figures from the Dubai Chamber of Commerce and Industry (DCCI) which show that the overall price increase of fresh food items and groceries rose 2 per cent on a weighted average (see box for details of weighting).    Specifically, this was because of a rise in the price of shelf groceries and not because of any movement in the price of fresh food.

When the consumer market research firm, AC Nielsen, tracked the price increase of a market basket of 500 goods over the 12-month period, from January 05-January 06, it came up with similar results. The overall price increase of fresh food and groceries over the 12-month period was 1.3 per cent, slightly down on the 1.6 per cent recorded a year earlier.

When the research company compared the price increases of fresh food and groceries at the supermarkets and hypermarkets the price basket remained stable. Only one supermarket showed an increase out of line with this trend, where goods in fact increased by 6 per cent. Another surprising result is that the Union Co-operatives, which are expected to offer prices lower than other supermarkets, are not necessarily the cheapest place to shop.

At a broader level, AC Nielsen also found that the percentage of items in the shopping basket that increased over the 2005-2006 period was 17 per cent, down from 28 per cent the previous year. And while the percentage of items that fell in price in 2005/2006 was less than the previous 12 months — 9 per cent compared with 15 per cent — the percentage of items where the price remained stable was up to 73 per cent from 57 per cent in the 2004-2005 period.

So much for being ripped off by the supermarkets then. As Spinney's CEO, Jannie Holtzhausen said: "Food price inflation in the UAE is, contrary to popular belief, quite low and in line with food price inflation in the rest of the world." The aim of a supermarket, he said, is to "make a profit at a reasonable margin." But as competition increases margins become finer. "We cannot afford to be charging prices out of line with competitors," he said.

He also commented on how promotions impact price. "You sometimes have a promotional short term influence," he said. "Some shelf stable products tend to reduce in price during peak trading periods like December or Ramadan due to an increase in volume, an increase in competition and market share battles between the major brand leaders.  If consumers are smart they can pick up a lot of bargains during that period."

What supermarkets find much harder to manage is the price of commodities such as sugar and wheat. Between January 2005 and January this year, the price of sugar has gone up between 16 and 30 per cent, depending on the brands. Supermarkets would normally absorb some, if not all, of this increase.

To reduce the impact of price fluctuations, supermarkets do hedge but typically not for more than three months. 

SO WHAT IS DRIVING INFLATION?

So if food price inflation is minimal, what are the real drivers of inflation? Oil price rises, excessive demand for property and the pegging of the dirham to the US dollar are the obvious answers. The leap in oil prices from late 2004 from about $20 a barrel to the $50-$60 range now, has pushed up transportation costs as well as the price of goods for which it is a major input. Oil price rises have also created huge financial surpluses in the region and seemingly unlimitless liquidity. And this has ignited inflationary pressure by creating an overwhelming demand for property. Combined with population growth exceeding 7 per cent annually and enthusiasm about the pending property law, and the rights it will give foreign owners, the prices and rents of real estate have soared, sometimes by more than 40 per cent. And because of the pegging of the dirham to the US dollar, any weakening in its value, will mean Dubai's consumers have to pay more for imported goods.

The negative impact these developments have had on the majority of Dubai's population is well documented. But the impact of inflation is not uniform. UAE nationals benefit from subsidised housing as well as free schooling. As one government economist said: "It is extremely difficult to determine the true level of inflation for everyone. The CPI is not applicable to the whole country because UAE nationals get subsidies from the government."

For the majority, however, not only has the cost of housing soared but so too have school fees, which, in many cases, have doubled.

Despite a high level of inflation, or maybe because of it, Dubai's economy continues to grow rapidly. Last year the economy grew by an estimated 13 per cent, faster than the economy of China. Perhaps this is why people stay in a city that many claim to be out-pricing itself.  One Indian expatriate who has lived in Dubai for the last eight years and earns Dh12,000 per month said: "My family would love to stay in Dubai but it has become very expensive so we have shifted to Sharjah and changed our children's school. We also go out less. But we intend to live here as Dubai offers quality of life, security, safety and other opportunities."

CONSUMER PRICE INDEX

The Consumer Price Index is a measure of the average change in consumer prices over time in a fixed basket of good and services. The Dubai Chamber of Commerce and Industry (DCCI) has only recently begun to compile the data necessary to calculate CPI. The first quarterly figures will be released in June but until there is a trend of historical data. The basket of goods is weighted according to the expenditure pattern of an average household.

   The weightings:

            Percentage

            Medical services                                    1.9

            Clothing                                                6.7

            Furniture                                              7.4

            Others                                      8.2

            Recreation and education                      10.3

            Food, beverage and tobacco 14.4

            Transport and communication            14.9

            Rent            36.1