UAE inflation at 0.43% in H1

Sharp correction in the real estate sector and weak domestic demand keep rate subdued

Inflation in the UAE stood at 0.43 per cent in the first half of 2010 as the rate remained subdued by a sharp correction in the real estate sector and weak domestic demand, official data showed on Wednesday.

The rate was also as low as 0.95 per cent last June compared with June 2009 and the rise was mainly due to an increase in the prices of food, liquor, home appliances as well as education and culture services.

The figures by the National Bureau of Statistics (NBS) of the Ministry of Economy showed inflation stood at only around 0.11 per cent in June compared with the previous month, one of its lowest levels in many years.

“During the first half of this year, inflation in the UAE stood at 0.43 per cent compared with the first half of last year,” NBS said.

Analysts said inflation in the UAE had sharply receded over the past 18 months mainly because of a steep decline in the real estate sector in the aftermath of the global fiscal turmoil, strengthening of the US dollar against major currencies, lower food prices and waning domestic demand.

“Strong domestic demand is usually a key factor in inflation as was the case in the UAE in 2008… but it has sharply slackened over the past 18 months and this has been evident from the very low bank credit to the private sector… personal loans have also been slow,” an Abu Dhabi-based banker said.

Inflation in the UAE, the second largest Arab economy, plunged to a nine-year low of 1.56 per cent in 2009 and could fall further this year before rebounding to around 2.5 per cent in 2011 because of an expected economic upturn.

But the rate in 2010 and 2011 will still be way below the peak 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.

The NBS said the plunge in the inflation rate last 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.

 “This shows inflation is no longer a major threat and the authorities have succeeded in reducing the rate of inflation.”

But the report noted that despite such low estimates, the global economic recovery combined with the increase in oil prices 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 that 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 one to 1.5 per cent by the end of 2010.”

The report showed education services recorded the highest increase in June compared with the same month of 2009, rising by around 10.5 per cent.

Food and liquor prices swelled by 4.41 per cent while there was an increase in the costs of home appliances and furniture. Slight increases were recorded in cultural services, restaurants and hotels, transport, and rents, water and electricity. The report showed there was a decline in the prices of clothing and footwear, communication, health services and other goods and services.

The UAE recorded the second highest inflation rate in the Gulf in 2008 after Qatar, where the rate exceeded 14 per cent.

Stoked mainly by high oil prices, inflation in the UAE had steadily risen over the previous years. It stood at only 1.4 per cent in 2000 before climbing to 2.8 per cent in 2001 and surging to five per cent in 2004. It continued its rise to reach 9.3 per cent in 2006 and 11.1 per cent in 2007 before hitting a record high in 2008.

According to the International Monetary Fund, UAE inflation is expected to pick up in the next few years but will remain far below the 2007-2008 levels.

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