Saudi inflation to rise in 2011

High rents will ally with a weakening US dollar and a rise in global commodity prices to boost inflation in Saudi Arabia above 5.5 per cent in 2011, its second highest level since 208.

Despite a decline in the previous months, inflation in the world’s oil superpower was as high as 4.7 per cent in March but monetary data published during that month indicates inflation could rise again, said National Commercial Bank (NCB), the largest Saudi bank.

“A glance at Saudi Arabia’s monetary variables in March 2011 ignites fears of inflationary pressures as the monetary base expands. Coupled with high commodity prices and the weak performance of the dollar so far this year, increase worries of rising local prices in the short-term,” NCB said in a study sent to Emirates 24/7.

It said the latest monthly report by the Saudi Arabian Monetary Agency (SAMA) shows a significant pick up in money supply (M3) by 13.8 per cent, the highest increase since July 2009.

The main contribution is attributed to demand deposits due to the royal decree of paying out two monthly salaries to all government workers, which was soon followed by a similar decision from most of the private sector, the study noted.

“The current inflation rate stands at 4.7 per cent during March, marking the seventh consecutive monthly decline. Furthermore, food and beverage prices have cooled to the slowest pace in twelve months at 4.9 per cent while renovation, rent, fuel and water prices increased by eight per cent,” it said.

“We expect the inflation rate to average higher than 5.5 per cent this year as global commodity prices remain elevated. Additionally, the expected pick up in credit facilities will drive private consumption as consumers seek to spend their royal ‘gifts‘.

Moreover, rent will act the leading factor to this year’s price increases as demand continues to grow albeit at a slower pace due to the 500,000 units to be constructed as one of the latest royal decrees announced over the past few weeks, the study added.

Saudi Arabia, the largest Arab economy, reeled under its highest annual inflation rate of 9.9 per cent in 2008 as a result of a surge in rents, global commodity prices, strong domestic demand during the height of the oil boom and weak US dollar, to which the Saudi riyal and other Gulf currencies are pegged.

Inflation eased to 5.1 per cent in 2009 before edging up to about 5.3 per cent in 2010. In a report this week, the Riyadh-based Jadwa Investments expected inflation to slip to four per cent in 2012.

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