GCC inflation to pick up in 2011

Inflation in Gulf oil producers is expected to edge up to more than four per cent through 2011 because of high global commodity prices but it is unlikely to return to the 2008 double-digit rates, a Kuwait bank has said.

After recording a rate of three per cent in 2010, inflation in the six-nation Gulf Cooperation Council (GCC) is expected to accelerate to more than four per cent in 2011, National Bank of Kuwait (NBK) said in a study.

“Higher inflation rates are expected across all GCC countries, although with varying degrees. The increase in GCC inflation will be largely driven by rising global commodity prices – and especially food prices, which could remain elevated this year,” the six-page study said.

“Similarly, energy prices may continue to rise in 2011 on the back of growing demand from emerging markets and the current political instability across the Middle East and North Africa (MENA) region. This in itself will tend to boost economic growth in the GCC, and sustain inflationary pressures.”

But the report said that even if inflation heads higher in the short run, the rate is still unlikely to reach the double digits recorded in 2008.

“Factors that had largely contributed to the previous peak in prices – notably rapid economic growth rates and soaring housing rents – are currently out of the picture. Moreover, commodity prices are notoriously volatile,” NBK said.

“As fast as they have managed to push inflation higher in recent months, the process could go into reverse if commodity prices begin to flatten out or fall.”

The report recalled that inflation in the GCC, which controls over 40 per cent of the world’s proven oil deposits, rocketed from almost zero at the start of the decade to a peak of more than 11 per cent in 2008.

With the onset of the global economic crisis in September 2008, inflation rates dropped to around three per cent in 2009. 

“Nevertheless, the global recovery in 2010 has set the stage for the return of inflationary pressures. Although the average rate of inflation was unchanged from 2009, this masks acceleration during the course of the year,” NBK said.

It noted that the past few months have seen inflation levels generally rise across the region mainly because of rising global commodity prices.

During the past year or so, Saudi Arabia has recorded higher inflation levels than its counterparts in the region, with inflation rising in the first half of 2010 and then lingering at around six per cent, the report said.

Kuwait and Oman also experienced relatively fast price increases last year, with inflation in Kuwait reaching Saudi levels near year-end.

The biggest turnaround though has been in Qatar, with prices there falling by as much as 10 per cent in year-on-year terms in the last quarter of 2009 before starting to rise again over the past few weeks.

Inflation in the UAE has generally risen, albeit at a slower pace while Bahrain was an exception as inflation seems to have slowed in the last few months.

“Although inflation levels have begun escalating once again, they remain modest compared to the soaring rates recorded before 2009. During that period, GCC economies experienced exceptionally rapid economic growth rates,” it said.

“Growth then was propelled by the upsurge in oil prices, which, combined with loose monetary policies, depreciation of the dollar and skyrocketing housing rents, took inflation levels in the GCC to modern-day highs.”

A breakdown showed inflation will rise to around 5.5 per cent from 5.1 per cent in Saudi Arabia, to five per cent from around 3.1 per cent in Oman, 4.6 per cent from four per cent in Kuwait, three per cent from less than one per cent in the UAE and to three per cent from two per cent in Bahrain. In Qatar, the rate could be near zero compared with a deflation rate of more than two per cent in 2010.

According to NBK, global commodity prices affect inflation in the GCC countries in three ways given their heavy reliance on imports:

1 Direct effects: The extent of the direct effects depends on the importance of these commodities in the ‘baskets’ of goods used to calculate consumer price inflation. Generally, commodity prices have a greater effect on overall inflation in countries where food and energy prices comprise a large portion of the consumer price index (CPI). This is often the case in developing countries.

2 Indirect effects: Rising commodity prices may eventually feed into prices of goods and services more generally in an economy. This could happen as a result of higher costs of production inputs or due to wages being pushed up to meet higher costs of living, consequently putting pressure on prices.

3 Effects on demand: Changes in commodity prices may well have varying effects on inflation depending on whether the country is a net exporter or importer of the commodity. If commodity prices rise, net commodity exporters are likely to see higher economic growth as rising incomes boost demand. This would tend to increase inflationary pressures.

However, net importers see their incomes reduced, cutting demand and, subsequently, inflation.

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