Saudi average annual inflation likely to reach 3.9% this year


Saudi Consumer Price Index (CPI), which reflects movements in the cost of living, accelerated sharply to 4.3 percent year-on-year in January, its highest in 5 years, as higher energy prices contributed to a significant rise in the housing and utilities, and transport segments, according to a research report.

“We anticipate domestic inflationary pressure to intensify during the year, driven by second-round effects stemming from the recent energy price reforms,” said economic researchers from Jadwa Investment.
Higher energy and transport costs for other business should somehow lead to higher prices for consumer goods, which will put pressure on other components of the CPI basket, stated Jadwa’s Inflation Update: January 2016.
But the economists said they expect the government to increase its monitoring of any unjustified increases in prices of basic foodstuffs and commodities.
The Ministry of Commerce and Industry (MCI) already carries out inspection rounds and takes legal procedures against any price violations or manipulative activities, all of which will likely be intensified to ensure that prices remain stable.
“We also expect that higher energy prices will likely have a negative impact on consumer spending, in the form of lower disposable income, which would reduce any price pressures on other commodities,” said the report.
“We maintain our expectation that the steady increase in the housing inflation rate will continue, driven mainly by strong domestic demand for housing units,” said the economists.
“We expect external factors’ contribution to inflation to remain subdued, particularly given a strengthening US dollar and the weaker prospects of global economic growth, leading to lower cost for imports and foodstuffs,” they added.
“The combination of these factors together with an expected continuation in the slowdown of the core index lead us to maintain our estimates for average annual inflation to 3.9 percent for 2016,” said the Jadwa researchers.
According to the Inflation Update, the recent reform to energy prices meant that housing and utilities and transport were the main sources of inflation as they accelerated sharply in January, both in year-on-year and monthly terms.
“Our estimate of core inflation, which excludes food and rent and other housing services, but includes transport, rose to its highest level in three years, reaching 3.7 percent year-on-year in January compared to 1.8 percent in December, mainly impacted by the rise in the transport segment. Other components of the core index posted mixed results,” said the report.
As a result of the sharp rise, the contribution of housing-related services toward overall inflation rose from 44 percent in December to 49 percent in January.
Transport saw the largest acceleration among all segments with its contribution rising from just 5 percent in December to 26 percent in January.
The housing and utilities segment rose from 4 percent year-on-year in December to 8.3 percent in January, its highest in six years.
This was a clear result of the recent energy price increases, which impacted electricity and water tariffs, both captured in the electricity and water sub-groups of this segment.
The electricity sub-group rose sharply from just 0.1 percent year-on-year in December to 12 percent in January, while the water sub-group reversed its 14-month deflationary trend to post a 135 percent, year-on-year rise. Month-on-month rises to electricity and water prices were also significant.
The year-on-year change in the rental inflation sub- group reached 4.1 percent in January, slowing from 4.8 percent during the previous month.
Despite rental inflation being the major sub-group of the housing and utilities segment, its slowdown did not prevent the overall segment from rising to its 4-year high.
The core index rose sharply to 3.7 percent, year-on-year in January, up from 2.3 percent in December. Components of the core index recorded mixed performances in January. Transport, which has the third highest weight in the CPI basket, clearly stood out, rising by 12.6 percent year-on-year, compared to 1.3 percent in December, and its highest in 21 years. The rise in the transport component was also a direct result of the increase to fuel prices, which was also significant in month-on-month terms.


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