Gulf inflation showed signs of moderating yesterday after months of rapid increases drove it to record levels, but pressures from elevated food and housing costs threaten to plague the region for years.
Kuwait's red hot inflation cooled slightly in May while Bahrain price rises steadied, new data showed, one day after money supply figures from Saudi Arabia, the Gulf's biggest economy, indicated that price pressures may wane. Inflation has been a source of stress in the Gulf, where most states rely heavily on migrant labour.
Inflation in Saudi Arabia, Kuwait and three other countries in the world's biggest oil-exporting region began accelerating in the second half of last year, soaring above 10 per cent in all states in the first half of the year.
Headline inflation rates would probably begin to level off on Gulf government measures to control rent rises, new housing supply and lower global food price increases, analysts said.
"Inflation cannot continue to go up at such a rapid pace," said Paul Gamble, head of research at Jadwa Investment. "Increases in food and commodity prices have slowed down now. But the worst isn't over. It's going to take a number of years for it to go down significantly."
In Kuwait, inflation eased slightly to 11.1 per cent in May after five months of rises took it to a record 11.4 per cent in April, government data showed.
Kuwait broke ranks with its Gulf neighbours preparing for monetary union in May 2007 when it severed its currency's link to the weak dollar to tackle imported inflation. Prices in Bahrain, the smallest Gulf economy, also stabilised at 3.1 per cent in June, the state's Central Informatics Organisation said yesterday. Data showed food prices fell six per cent in June from the month earlier.
Dollar pegs in most Gulf states have driven up import costs as the United States currency fell to record troughs against the euro as recently as this month.
They have also forced the Gulf to track US interest rate cuts even though their economies are soaring on a more than six-fold rise in oil prices since 2002.
"Inflation will continue to be driven by rents and food. But prices are beginning to stabilise at higher levels," said Monica Malik, an economist at EFG-Hermes investment bank. "In the second half of last year, inflation was rapidly picking up across the Gulf, so you would have this base effect kicking in."
Gulf governments have increased price controls, boosted subsidies and cut import duties on some goods to cool down prices, while also raising employee wages.
In top oil exporter Saudi Arabia, inflation more than doubled in the seven months to April to 10.5 per cent – the highest level since at least the oil boom of the 1970s. Between 2000 and 2005, inflation was less than one per cent in the kingdom.
Saudi inflation eased slightly to 10.4 per cent in May, and price rises are expected come off in the second half of the year, the Saudi central bank governor has said. Echoing those comments, Oman's deputy central bank chief said this month inflation probably hit a peak at a record 13.2 per cent in May.