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29 March 2024

UAE inflation to pick up in 2011

UAE inflation to remain subdued this year. (SUPPLIED)

Published
By Nadim Kawach

Inflation in the UAE is projected to remain subdued in 2010 but will pick up in 2011 mainly because of domestic economic upturn and a recovery in the real estate sector, according to a government report.

Inflation rate stood at 1.56 per cent in 2009 and could be even lower this year before it climbs again to an average 2.5 per cent in 2011, said the report by the National Bureau of Statistics (NBS), an affiliate of the Ministry of Economy. 
 
But the expected rate in 2010 and 2011 will be way below the record inflation level of 12.3 per cent in 2008, when the local economy recorded one of its highest growth rates and rents and food prices were at their highest levels. 
 
In a study about inflation in the country, NBS said the plunge in the rate to only about 1.56 per cent from the record level in the previous year was a result of a slowdown in the economy, slower consumer domestic demand, a sharp decline in food prices and lower individual and corporate spending. 
 
"The gradual economic recovery in 2010, especially in the real estate sector, is expected to slightly increase the rate of inflation between one and 1.5 per cent by the end of 2010, and between two and 2.5 per cent in 2011," it said. 
 
On a quarterly basis, the report showed the UAE recorded a slight reversal in the inflation rate by only around 0.01 per cent at the end of the first quarter of 2010 compared to the end of the first quarter of 2009. 
 
"This shows inflation is no longer a major threat and the authorities have succeeded in reducing the rate of inflation. The rate also improved by 0.51 per cent at the end of the first quarter compared to the fourth quarter of 2009."
  
The report noted that despite those estimates which were based on time-series data on consumer prices in previous years, the global economic recovery, coupled with the increase in the price of oil, is expected to spur capital flows into the UAE and this could put upward pressure on the level of prices. 
 
"There are some indications that the inflation rate is exhibiting this increasing trend as reflected in higher prices of basic foodstuffs, steel and building materials, which will eventually lead to an increase in the UAE import bill, which, in turn, will be reflected in an increase in domestic prices," the report said. 
 
"Taking into account these developments, the rate of inflation is expected to be above the level estimated at 1-1.5 per cent by the end-2010." 
 
In 2008, the last year of the second oil boom, the UAE recorded its highest annual inflation rate, which was also the highest in the GCC after Qatar. 
 
NBS attributed the surge to the expansionary monetary policies undertaken by the UAE, higher rents and food prices, a surge in domestic demand and the weakening in the US dollar, to which the dirham is pegged. 
 
"Low rates of interest also contributed to higher inflation in 2008 as liquidity increased and consumer spending explodedÖ this push-up wages, which in turn, were passed on to consumers through higher retail prices," NBS said.
  
"This high rate of inflation was also the result of increases in the price of fuel compared to other countries in the GCC, and increases in the price of imports especially of foodstuffs which reached 85 per cent of the total food requirements of the UAE. This 'imported inflation' was caused by the fall in the value of the US dollar against the euro and other major currencies especially since a large percentage of UAE imports are from the Eurozone Area." 
 
NBS's projections for the UAE inflation in 2010 and 2011 are relatively conservative compared with those of the International Monetary Fund (IMF), which put the rate at about 2.2 per cent this year and three per cent in 2011. The IMF also expected inflation to climb to 3.2 per cent in 2015.