Kuwait in­fla­tion re­vised down as rents see de­fla­tion

Kuwait Times - - BUSINESS -

Re­vised CPI sta­tis­tics re­veal sig­nif­i­cantly lower in­fla­tion in re­cent months. In­fla­tion came in at 1.4 per­cent year-onyear (y/y) in June fol­low­ing a re­vamp of the CPI. Rad­i­cally lower hous­ing in­fla­tion was a large rea­son be­hind the drop, with the sec­tor now seen in de­fla­tion­ary ter­ri­tory. Other sec­tors saw smaller re­vi­sions in their pace of in­fla­tion over the last few months. In­fla­tion data for the three years through 2016 were re­vised up­ward, though only slightly. In­fla­tion is now likely to av­er­age be­low 2 per­cent in 2017, down from 3.5 per­cent in 2016. From a pol­icy per­spec­tive, th­ese new fig­ures ren­der the in­fla­tion out­look more be­nign and leave ad­di­tional room for flex­i­bil­ity on both the fis­cal and mon­e­tary fronts.

The re­vi­sions are part of a broader re­vamp of the con­sumer price in­dex (CPI), which was also re­based to 2013 prices. The re­vamp, which hap­pens ev­ery few years, in­cluded some changes in the sec­toral weights and the bas­ket of prod­ucts sur­veyed ev­ery month. The most no­table change was a rise in the weight for hous­ing ser­vices, which was in­creased by four per­cent­age points to 33 per­cent. The weight for the ed­u­ca­tion sec­tor was also in­creased. Mean­while, weights for food & bev­er­ages, cloth­ing & footwear, and other seg­ments were re­duced.

Prices in hous­ing ser­vices are now seen in de­fla­tion, hav­ing slowed notably over the past twelve months, ac­cord­ing to the re­vised CPI data. Hous­ing in­fla­tion, which is dom­i­nated by growth in hous­ing rents, slowed to -2.3 per­cent y/y in June (Chart 2). Be­fore the lat­est re­vi­sions, the pace of in­fla­tion in this sec­tor stood at 4.3 per­cent y/y for the most re­cent data in March 2017; this was re­vised to a small 0.1 per­cent y/y de­cline. In­fla­tion in this sec­tor is now seen to have slowed con­sid­er­ably from 7.3 per­cent y/y at its peak a year ago, in line with the soft­ness that has been vis­i­ble in the hous­ing mar­ket gen­er­ally over the last few years.

In­fla­tion in food prices ticked up fol­low­ing months of soft­ness. Lo­cal food prices were up 0.8 per­cent y/y in June, the most rapid in­crease in nearly a year (Chart 3). This comes at a time when in­ter­na­tional food prices re­main in de­cline, though they have shown some signs of steady­ing. The Com­mod­ity Re­search Bureau food­stuffs in­dex was down 1.9 per­cent y/y in June. The lat­est in­fla­tion fig­ure may have been pushed up due to sea­sonal fac­tors, par­tic­u­larly since June co­in­cided with Ra­madan this year.

There was a no­tice­able up­ward re­vi­sion in in­fla­tion in the trans­porta­tion sec­tor and a slight ac­cel­er­a­tion in June. Trans­porta­tion prices, which jumped when fuel prices were raised in Septem­ber 2016, saw in­fla­tion ac­cel­er­ate to 16 per­cent y/y in June. How­ever, there have been no fur­ther hikes in fuel rates. In­fla­tion in the sec­tor slowed to an an­nu­al­ized 7 per­cent in June.

Cloth­ing & footwear and re­cre­ation ser­vices have also seen up­ward re­vi­sions and a ris­ing trend in in­fla­tion in re­cent months. In­fla­tion in cloth­ing & footwear rose to 2.2 per­cent y/y in June, af­ter a pe­riod of de­fla­tion in late 2016 and early 2017. Prices dur­ing the last three months through June rose at an an­nu­al­ized pace of over 13 per­cent. A sim­i­lar trend was also seen in the re­cre­ation sec­tor, where in­fla­tion rose to 3.2 per­cent y/y and price growth topped an an­nu­al­ized 10 per­cent over the last three months through June.

In­fla­tion is ex­pected to see some lim­ited up­ward pres­sure in the com­ing months from hikes in util­ity tar­iffs. The util­ity price hikes, which have hit com­mer­cial rentals and are sched­uled to hit the “apart­ment build­ings” sec­tor in Septem­ber, could push in­fla­tion up to around 2 per­cent in 2017.

At this point, no fur­ther pres­sures are ex­pected in 2018 es­pe­cially with our ex­pec­ta­tions that the promised val­ueadded tax (VAT) would likely not be im­ple­mented be­fore 2019.

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