Riyadh, June 16: An increase in housing supply has depressed rents in Saudi Arabia and the trend is expected to be maintained through 2011, preventing a sharp rise in inflation in the world’s oil superpower, a Saudi investment firm has said.
The decline has already allied with lower food prices to send year-on-year inflation rate in the Gulf Kingdom to a 6-month low of 4.6 per cent in May, the Riyadh-based Jadwa Investments said in a study sent to Emirates 24/7.
“The ongoing decline in rents and lower food prices more than offset small rises elsewhere…….a further fall in rental inflation and lower food prices pulled inflation down in May,” the study said.
“Rental inflation fell to 7 per cent, the lowest rate for exactly four years. Rental inflation should remain on a downtrend as more property enters the market, though the pace will probably slow in a few months because of base effects.”
Jadwa said the decline in food price inflation was largely due to trends in fresh food prices. It said global food prices also fell in May although they were still around 37 per cent higher than in May 2010.
The report saw a lag between moves in international food prices and those in the Kingdom, but added that local factors have kept prices below where we would expect given the international trend.
“There remains a risk of further run-up in local food prices. We think that the peak of consumer spending associated with the bonus for public- and many private-sector workers occurred over April and May,” it said.
“The inflationary impact from this spending in year-on-year terms has so far been limited to a very modest increase in inflation for education and entertainment and a lower decline for home furniture inflation.
Given reports of retailers taking advantage of the bonuses to raise prices, the subdued inflation is notable. We still expect higher government spending to lift inflation over the remainder of the year.”
Citing official data, Jadwa said monthly inflation was unchanged at 0.4 per cent in May adding that lower food prices were more than offset by rises in other areas. “The largest move was for ‘other expenses and services’ and specifically for local jewelry prices, which rose by 5.7 per cent,” it said.
“These tend to move in line with international gold prices, through the gold price averaged only 1.9 per cent higher in May, so the increase may reflect retailers upping prices owing to the public-sector bonus.”
The study said other price rises could be attributable to the bonus, including home appliances and men’s clothing, but that they are not widespread.
It said prices of entertainment devices (TVs etc) and home furnishings (curtains, blankets etc) were unchanged.
Food prices fell in May, particularly those of fresh fruits, fish and some vegetables, the report noted, adding that there were some large moves in individual prices. “For example, the price of plums fell by 33 per cent, while local onion prices were up by 21 per cent.”
Jadwa expected the overall inflation rate in Saudi Arabia, the largest Arab economy to slip to 4.9 per cent in 2011 from 5.3 per cent in 2010 and around 5.1 per cent in 2009. Inflation in the Kingdom climbed to its highest annual level of 9.9 per cent in 2008 because of strong domestic demand during the oil boom, a surge in rents and food prices, and the weakening in the US dollar, to which the Saudi currency, riyal, is pegged.
–Agencies