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KSA inflation: Upside risks may emerge in H2

Saudi CPI inflation fell for the fourth consecutive month in March, reaching 2.6 percent year-on-year (y-o-y) in March compared with 2.8 percent in February, according to a report released on Wednesday.
It said core inflation slightly increased on the back of higher prices of “other expenses and services”.
Jadwa Investment’s Inflation Update for March 2014 said lower food price inflation was the main reason for the CPI decline while rental inflation picked up slightly to become the largest single contributor to headline inflation in March.
The report said negligible external price pressures, due to lower commodity prices, a strong dollar and subdued inflation among trading partners should offset any local inflationary pressures.
Citing the Central Department of Statistics and Information (CDSI), Jadwa Investment said Saudi Arabia’s inflation rate fell for the fourth consecutive month in March, reaching 2.6 percent year-on-year compared with 2.8 percent in the previous month.
It said lower food price inflation was the main reason for the decline while rental inflation picked up slightly.
On a monthly basis, inflation increased slightly to 0.2 percent in March up from a two-year low of 0.1 percent in February.
Jadwa researchers’ estimate of the core index, which excludes food, rental and housing-related services, rose by 1.5 percent year-on-year (0.1 percent month-on-month) up from 1.4 percent in February.
This was almost entirely due to a pick up in the prices of “other expenses and services”, the largest component of the core index.
The latter was, in turn, driven mainly by gold prices, which got off to a good start this year, after a 28 percent drop in 2013.
However, the recent fall in gold prices at the end of March means a stable outlook for the inflation of “other expenses and services” component of the core index.
The Jadwa report said food price inflation was at its lowest level in March since August 2012, at 3.8 percent y-o-y. In monthly terms, food prices actually contracted by 0.3 percent.
As highlighted in Jadwa’s previous inflation update, this was expected as both global food inflation and domestic wholesale food inflation remained subdued.
According to the UN Food and Agriculture Organization, year-on-year global food price inflation remained in a deflationary mood for the ninth consecutive month in March.
With food accounting for the largest proportion of the cost of living index (21.7 percent), this slowdown was sufficient to lower headline inflation despite the increase in rental inflation.
Partially offsetting the impact of lower food price inflation was a rebound in housing and related items inflation, which climbed back over 4 percent, similar to levels in August last year.
As a result, the report said housing and related items inflation surpassed food inflation as the largest contributor to headline inflation in March, the first time since April 2012 .
It added: “We maintain our view that the uncertainty associated with the unclear domestic housing policy, and its implications on property valuations, will increase the unpredictability of rental and housing inflation. Outside of housing and other expenses and services inflation, there remains very little domestic price pressure in the economy. The small and mainly downward movement in other components of the inflation basket suggests that inflation will maintain the current level over the next few months, but upside risks likely to emerge in the second half of this year.”
Jadwa Investment added: “At present, we expect average inflation to fall to 3 percent this year, compared with 3.5 percent in 2013.”
It said external inflationary pressure would remain muted due to declining inflation among trading partners, lower commodity prices and a strengthening of the dollar. The domestic environment will therefore dictate the CPI trend for the rest of the year.
The report said: “We expect inflation to remain at its current level for the next few months, but it will start to increase toward the second half of the year on the back of seasonal domestic consumption demand, elevated government spending and lower base effects. The ample liquidity in the banking system could feed into an acceleration of private sector credit growth. This would, in turn, create an upward pressure on prices. However, with growth in money supply, currency outside banks and credit extended to the private sector in line with activity in the non-oil sector, we do not expect any change in monetary policy over the coming 18 months, especially given the current inflation trend.”