Kuwait in­fla­tion soft­ens to 1.2% on de­fla­tion­ary costs

Hike in elec­tric­ity and wa­ter tar­iffs may nudge prices up

Kuwait Times - - BUSINESS -

KUWAIT: Kuwait’s con­sumer price in­fla­tion eased to a new multi-year low of 1.2 per­cent in Au­gust, mainly on the back of de­fla­tion­ary pres­sures from the hous­ing com­po­nent and weak food in­fla­tion. Core in­fla­tion, which ex­cludes hous­ing rent and food costs, re­mained more pro­nounced at 4.2 per­cent yearon-year (y/y), pri­mar­ily due to the direct and in­di­rect ef­fects of the fuel price hikes im­posed in Septem­ber 2016. None­the­less, these ef­fects have largely sub­sided re­cently and are slated to wit­ness a down­ward cor­rec­tion in the near- to medium-term due to base ef­fects. In this set­ting, the over­all in­fla­tion rate is ex­pected to face some fur­ther down­ward pres­sure dur­ing the same pe­riod. If trans­porta­tion costs are ex­cluded, in­fla­tion held at a healthy 2.3 per­cent y/y thanks to on­go­ing in­fla­tion­ary gains in ser­vices ex­clud­ing hous­ing rent.

The coun­try’s in­fla­tion is now likely to av­er­age closer to 1.5 per­cent in 2017, no­tice­ably lower than the 3.5 per­cent an­nual av­er­age recorded in 2016. While hikes in elec­tric­ity and wa­ter tar­iffs on the apart­ment sec­tor, which took ef­fect in Au­gust, are pro­jected to ap­ply up­ward pres­sures in the months ahead, these pres­sures are likely to be par­tially off­set by the de­fla­tion­ary rates in hous­ing rent, soft food in­fla­tion and fad­ing price growth in the trans­porta­tion sec­tor.

Hous­ing rents re­mained in de­fla­tion­ary ter­ri­tory in Au­gust. In­fla­tion in hous­ing ser­vices - mostly com­prised of hous­ing rents and up­dated quar­terly - slowed sharply from the sec­ond half of 2016 on­wards, in line with softer ac­tiv­ity in the hous­ing mar­ket. Rental costs saw their first de­cline in years dur­ing 1Q17. In 2Q17, rents de­clined by a fur­ther -2.3 per­cent y/y.

Lo­cal food price in­fla­tion re­mained stub­bornly weak on the back of softer in­fla­tion in global food prices. Lo­cal food prices de­clined by a mere -0.2 per­cent y/y in Au­gust as the pace of in­crease in in­ter­na­tional prices of com­mod­ity foods soft­ened. Ac­cord­ing to the Com­mod­ity Re­search Bureau, global food price in­fla­tion re­versed its up­ward trend in Au­gust and fell from an al­most three-year high of 4.4 per­cent y/y in the pre­ced­ing month, to a mere 0.5 per­cent y/y. This soft­ness is pro­jected to limit any sig­nif­i­cant in­creases in lo­cal food costs over the forth­com­ing months.

In­fla­tion in the re­tail sec­tor was mixed but still re­flected some im­prove­ments in con­sumer de­mand as well as a weaker di­nar. In­fla­tion in cloth­ing & footwear eased in Au­gust, but at 1.6 per­cent y/y it re­mained near multi-month highs. In­fla­tion in “other goods & ser­vices” and fur­nish­ings & house­hold main­te­nance re­mained rel­a­tively solid at 2.1 per­cent y/y and 3.5 per­cent y/y, re­spec­tively. The rel­a­tively more el­e­vated in­fla­tion rates across these three ma­jor re­tail seg­ments, mir­ror the im­prove­ments be­ing wit­nessed in con­sumer de­mand and the re­cent de­pre­ci­a­tion in the lo­cal cur­rency. The weaker dol­lar con­tin­ues to weigh on the di­nar’s trade-weighted in­dex, which is cur­rently down 3.5 per­cent year-to-date. Since a large pro­por­tion of the goods in the re­tail sec­tor are im­ported, the weaker cur­rency has propped up costs in the sec­tor. In­fla­tion in ser­vices ex­clud­ing hous­ing has been healthy around 3-4 per­cent thus far in 2017. In­fla­tion in this com­po­nent has been sup­ported by dou­ble-digit in­fla­tion­ary gains in trans­porta­tion costs. While it may edge lower in the near term as the im­pact of last year’s fuel price hikes fades, it is still ex­pected to be sup­ported some­what by on­go­ing gains in in­fla­tion in recre­ation & cul­ture.

Food price in­fla­tion re­mains weak

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