Dollar peg and rents pushing inflation in Saudi Arabia

Annual inflation in Saudi Arabia rose to at least a 27-year high of 10.5 per cent in April from 9.6 per cent the previous month, fuelled by rents and food prices in the world's largest oil exporter.

The cost of living index for the largest Arab economy was 115.2 points on April 30 compared with 104.3 points a year earlier, government data showed yesterday.

The rental index – which includes rents, fuel and water – surged 16.9 per cent, with rents soaring 20.4 per cent, while food and beverages cost surged 16 per cent, according to the data.

Like most of its neighbours, Saudi Arabia pegs its riyal currency to the dollar, which has fallen to record lows against the euro and a basket of major currencies this year.

Domestic factors, such as rents, play a role in stoking inflation, but the main driver is the currency situation, said Mary Nicola, Middle East economist for Standard Chartered bank in Dubai. "Now that food prices are rising globally and Saudi is a net importer of food, that is having a negative impact on it," Nicola said.

Last year, Saudi Arabia imported 960,000 tonnes of rice, making it the world's sixth-biggest rice importer, according to US Department of Agriculture data.

Price rises are plaguing the Gulf, where economies are surging on a near sixfold increase in oil prices during the past six years.

Dollar pegs force the Gulf states, except Kuwait, to track the US in cutting interest rates. With the dollar tumbling this year to record lows, some imports have become more expensive.

"We expected inflation to increase largely because of the weakening dollar and the growth in money supply; the dollar is weakening and there is no monetary tools to mitigate the effects of inflation," Nicola said.

"The increase in rents could be largely attributed to the growth in money supply," she added.

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