8.45 AM Friday, 29 March 2024
  • City Fajr Shuruq Duhr Asr Magrib Isha
  • Dubai 04:56 06:10 12:26 15:53 18:37 19:52
29 March 2024

Lower rents to drive inflation further down in UAE

Picture used for illustrative purposes only. (FILE)

Published
By Nadim Kawach

Inflation in the UAE stood at around 0.54 per cent in the first eight months of 2010 and could end the year at as low as one per cent because of lower rents and a fall in prices of other items, official data showed on Tuesday.

Despite a surge in petrol prices and a sustained increase in education fees, inflation has remained at one of its lowest levels so far this year to extend a downward trend since 2009, when the rate dived to just about 1.5 per cent from one of its highest levels of nearly 12.3 per cent in 2008.

Figures by the government National Bureau of Statistics (NBS) showed the consumer price index (CPI) rose by only around 0.9 per cent year-on-year in August, fueled by an increase in food and petrol prices, as well as a surge in education, culture and home supplies.

But housing continued to reverse a sharp sustained increase over the previous two years and declined in August by around 1.3 per cent mainly due to lower rents in Abu Dhabi and Dubai, the largest emirates in the country.

The housing sector was the main inflation driver in 2008 along with high food prices, strong domestic demand and weakening of the US dollar. In 2009, the housing sector became the main driver of weakening inflation.

“In 2009, the housing sector, which constituted 39 per cent of the CPI, witnessed a very slight increase of 0.4 per cent, the main attribute for the slim gain in consumer prices,” the Kuwaiti-based Global Investment House (GIH) said.

It cited data by the real state analysis firm Asteco, the rental rate of apartments and villas in Abu Dhabi and Dubai declined considerably during 2009.

In Abu Dhabi, apartment rents decreased by an average of 10 per cent during the fourth quarter of 2009 due to new supply of housing entering the market, and the fact that some people relocated to Dubai on the back of cheaper rents.

Dubai apartment rents did not suffer as much as Abu Dhabi during that period, while leasing rates for villas began to stabilize. During the second quarter of 2010, rents in Abu Dhabi continued their downward trend and dropped by 7-15 per cent and the trend is projected to continue through 2010 as housing supply will likely gain momentum, the report showed.

“Based on reports released by NBS, CPI reached 114 in 2009 and compared with its 2007 base year, the increase of prices was 1.56 per cent against 2008 prices. The CPI increase in 2008 was 12.26 per cent and was the highest it reached since 2000. The main reason for the minimal growth in inflation was the decline in real estate prices which affectively declined rents,” GIH Said.

It noted that a host of factors led to the surge in inflation rates in 2008, mainly the surge in rents. The increase in oil prices during that year also pushed up the CPI by increasing fuel prices in the UAE and around the world.

“The expansionary fiscal policy implemented by the UAE led to low interest rates which in turn increased liquidity and consumer spending. The surge in consumer spending led to an increase in wages, which led to higher retail prices passed on to consumers. Increases in prices of imports, especially food items, also led to high inflation rates.

Since a large portion of UAE’s imports are from Europe, the drop of the US dollar against the Euro and other major currencies was the main factor that pushed up import prices,” the report said.

GIH said the fall inflation in 2009 was also a result of the global fiscal crisis, which is forcing consumers to save more money and spend less, adding that this is placing a downward pressure on price levels.

“Likewise, private investment expenditures by foreigners decreased which lowered prices by slowing aggregate demand. A positive influence of the low inflation rate of 2009 is that it is lowering production costs and improving the competitiveness of the economy,” the report said.

“According to NBS, the inflation rate at the end of 2010 is expected to be as low as 1.1 per cent but it will steadily rise to 2-2.5 per cent at the end of 2011 as the global economic recovery finds pace.”

A CPI breakdown showed food and beverage prices rose year-on-year by 4.22 per cent in August while there was an increase of nearly 10.57 per cent in education, 6.2 per cent in culture, 5.73 per cent in transport due to higher petrol prices and 4.72 per cent in home supplies. Ready made garments and footwear slumped by 4.69 per cent and rents by around 1.3 per cent. There was also a decline of 5.44 per cent in communications and 0.43 per cent in health services.