UAE's inflation surges 11.1p to 20-year high

DUBAI - Fuelled by steep rent hikes and a declining dollar-pegged currency, UAE's inflation soared to a 20-year record high of 11.1 per cent in 2007, exceeding estimates made by various official sources and global research agencies.

In 2006, the UAE's inflation rate rose by a third to 9.3 per cent, up from 6.2 per cent in 2005, also driven by the rising cost of accommodation.

According to latest estimates, with no end sight for the easing of rents that had shot up 17.5 per cent last year, coupled with skyrocketing food and fuel prices, inflation would be headed for another record surge in 2008, even beyond 12 per cent despite serious efforts initiated by the Ministry of Economy to contain inflation at five per cent this year.

The Ministry of Economy's inflation data was slightly higher than the 10.9 per cent inflation confirmed last week by Abu Dhabi's Department of Planning and Economy's study.

However, both studies blamed the increase in UAE's inflation mainly on the surging cost of house rentals and food price spikes. Consumer prices in Abu Dhabi increased by 11.5 per cent in the first quarter of 2008 from 10.7 per cent a year earlier.

The Ministry of Economy said in a statement yesterday that costs of rent and related household items, which account for 36 percent of the consumer price index, rose 17.5 per cent last year. The 'other goods and services' category rose 16.8 per cent, the ministry said without giving a breakdown of how steeply]food prices rose.

The Institute of International Finance (IIF) had warned that the average annual inflation in the GCC is likely to climb to seven per cent in 2008 if exchange rate regimes of the member countries whose currencies are pegged to a tumbling dollar are not reconfigured.

The Washington-based group, which represents the world's large banks, said inflation is trending upwards in most GCC countries and is most pronounced in Qatar and the UAE, where consumer price increases are in two-digit levels.

Analysts said given the persistent inflationary pressures, UAE's move to target inflation at five per cent this year to rein in sky-rocketing price increases would be ineffective unless the country adopts a flexible monetary policy.

Announcing the inflation target in March, Sultan bin Saeed Al Mansouri, Minister of Economy, has said his objective was to bring down inflation by more than 50 per cent within this year. 'Targeting five per cent is a big challenge, and we hope we can achieve it. We are trying to look and see how that can be achieved,' the minister said.

The latest inflation figure was derived by measuring the percentage change in prices of a representative basket of goods and services consumed by the average UAE household.

Research conducted by the MoE's Consumer Price Index (CPI) Division revealed that the 2007 rate resulted from varying increases in the consumer prices of all expenditure groups.

Local governments are presently attempting to contain inflation by capping annual rent increases at various levels. The MoE itself has implemented various inflation-related initiatives over the past months, such as convincing cooperatives and private retailers to fix the prices of basic commodities which constitute around 70 per cent of retail trade in the UAE. The Ministry also recently signed a Memorandum of Understanding with several local cement producers to increase production and thus reduce the prices of building materials. Finally, the Ministry has exempted cement and steel from custom duties at all UAE ports.

UAE's latest inflation figures came amid warning by economists that runaway inflation in the Gulf, projected to average at 11 per cent in 2008, and ease to around nine per cent in 2009, pose the main challenge to GCC currency union. According to the official convergence criteria, an inflation rate of no more than two percentage points above the regional average is allowed. 'On the basis of 2007 data, Qatar is 6.4 points above the regional average inflation rate and the UAE is 3.5 points above it. Based on our forecasts for 2008 inflation, the UAE is likely to move back to within two points (as the regional average shifts higher this year), but Qatar’s differential is likely to remain in excess of three points,' said Samba, a leading Saudi bank.