GCC inflation surges to record highs
Inflation in Saudi Arabia in July accelerated to 11.1 per cent, its highest level in at least 30 years, while in Abu Dhabi, the capital of the UAE, prices rose 12.9 per cent in June, according to the latest data.
Inflation in Gulf Arab states has raced ahead on record revenues from windfall oil profits and massive public spending plans designed to transform the desert states into centres of finance, tourism, manufacturing and education.
"We were expecting prices to cool off during the summer, which sees a drop in demand from other months but this is not happening," said John Sfakianakis, chief economist at SABB bank, HSBC's Saudi subsidiary.
The states have pegged their currencies to the US dollar, whose recent recovery has done little to dampen inflationary fires, leaving Gulf central banks with few tools to combat economic overheating and soaring prices.
In Saudi Arabia, inflation has stirred public discontent and led the government to attempt a number of measures to mitigate pressures, mainly in the form of price controls, charity and subsidies on food items.
Analysts expect annual inflation to hit its peak towards the end of the third quarter which coincides with the end of Ramadan, the Muslim fasting month which began on Monday and typically sees a surge in both consumption and prices.
Saudi Arabia is the world's largest oil exporter and the GCC's most populous nation.
SPENDING SPREE
Sfakianakis said heavy government spending, soaring food costs and a housing bottleneck that has pushed rents higher was more of an inflation driver than loose monetary policy by the central bank.
"The government spending is a key driver of inflation which does not look set to moderate significantly ... Inflation will see peak in 2008. The coming months will coincide with a high spending season," he added.
Inflation in neighbouring Abu Dhabi, the biggest member of the United Arab Emirates federation, rose 12.88 per cent in the second quarter of 2008, signalling a likely multi-decade high for the federation on the whole.
The UAE only releases national inflation figures annually. At 11.1 per cent in 2007, it had hit the highest level in at least 20 years.
Like Saudi Arabia, the central bank of the UAE has fixed its currency, the dirham, to the US dollar even as inflation threatens to put a cap on growth as workers' wages fail to keep up with the cost of living.
Some experts say the true inflation rate in the UAE far exceeds official figures and is likely closer to 20 per cent. Increases in food prices drove the rise, with the food index rising 19.24 per cent in the quarter, compared to one year ago. The rental index – which includes rents, fuel and water – rose 18.29 per cent, according to an official report by its department of planning and economy.