Inflation Cools; Deflation Looms
DUBAI - Inflation in the UAE is rapidly losing its bite. Thanks mostly to plunging costs for housing, the annual rise in consumer prices eased to 1.9 per cent in April compared to 7.0 per cent in January, the government disclosed in its first-ever publication of monthly inflation data.
Prices for food and beverages, transportation, housing and a basket of other goods and services have decelerated month by month since the start of the year, according to statistics that the Ministry of Economy released on Wednesday.
Overall, prices for the first four months of the year were 4.9 per cent higher than for the same period of 2008, the consumer price data showed.
In a parallel announcement, the UAE Central Bank said that the country’s money supply grew during the first quarter of 2009 at its slowest pace in four years. The broadest measurement of the money supply – including currency in circulation, time and fixed deposits, and government deposits — rose by 1.1 per cent in the first quarter from the last quarter of 2008.
Inflation in recent years has mirrored the scorching economic growth that the UAE experienced until last autumn’s dramatic downturn. Inflation accelerated from 4.0 per cent in 2005 to 9.3 per cent in 2006, 11.1 per cent in 2007 and — according to International Monetary Fund estimates — 11.5 per cent in 2008.
Many businessmen welcomed the first official evidence that inflation has indeed cooled off.
“Inflation slowing down in Dubai is good…,” said Dr Belaid Rettab, senior executive director of the Dubai Chamber of Commerce & Industry. “It eases the pressure on the overall economy because it will enable Dubai to become more competitive. Reduced inflation will bring down the cost of business, it will encourage consumers to consume more, and this will redound to higher profits for business.”
Kamal Vachani, director of the Al Maya Group supermarket chain, said that the steep decrease in the UAE’s first official consumer price index shows that the middle and lower income people are benefitting from lower house rents and cheaper imports.
“The real estate market crash has helped to bring down rents to 2006 levels, thus allowing people to have more disposable income to spend on food products and other consumer items. I believe, the trend signals a positive outcome for consumers … It is also a sign that economy is stabilising after a period of uncertainty.”
However, some economists who studied the data warned that the downward trend might soon develop into deflation, or negative inflation, which they said could create problems of its own.
“Lower prices mean lower profit for companies, which in turn means lower wages, which in turn leads to lower consumption, which eventually translates into lower growth, which delays economic recovery,” said Tarek Coury, economist at the Dubai School of Government.
Prices for food and beverages, transportation, housing and a basket of other goods and services have decelerated month by month since the start of the year, according to statistics that the Ministry of Economy released on Wednesday.
Overall, prices for the first four months of the year were 4.9 per cent higher than for the same period of 2008, the consumer price data showed.
In a parallel announcement, the UAE Central Bank said that the country’s money supply grew during the first quarter of 2009 at its slowest pace in four years. The broadest measurement of the money supply – including currency in circulation, time and fixed deposits, and government deposits — rose by 1.1 per cent in the first quarter from the last quarter of 2008.
Inflation in recent years has mirrored the scorching economic growth that the UAE experienced until last autumn’s dramatic downturn. Inflation accelerated from 4.0 per cent in 2005 to 9.3 per cent in 2006, 11.1 per cent in 2007 and — according to International Monetary Fund estimates — 11.5 per cent in 2008.
Many businessmen welcomed the first official evidence that inflation has indeed cooled off.
“Inflation slowing down in Dubai is good…,” said Dr Belaid Rettab, senior executive director of the Dubai Chamber of Commerce & Industry. “It eases the pressure on the overall economy because it will enable Dubai to become more competitive. Reduced inflation will bring down the cost of business, it will encourage consumers to consume more, and this will redound to higher profits for business.”
Kamal Vachani, director of the Al Maya Group supermarket chain, said that the steep decrease in the UAE’s first official consumer price index shows that the middle and lower income people are benefitting from lower house rents and cheaper imports.
“The real estate market crash has helped to bring down rents to 2006 levels, thus allowing people to have more disposable income to spend on food products and other consumer items. I believe, the trend signals a positive outcome for consumers … It is also a sign that economy is stabilising after a period of uncertainty.”
However, some economists who studied the data warned that the downward trend might soon develop into deflation, or negative inflation, which they said could create problems of its own.
“Lower prices mean lower profit for companies, which in turn means lower wages, which in turn leads to lower consumption, which eventually translates into lower growth, which delays economic recovery,” said Tarek Coury, economist at the Dubai School of Government.
Ram Buxani, executive vice chairman ITL-Cosmos Group, an importer and retailer of textiles and consumer electronics, shared Coury’s concern. The abrupt slowdown in inflation “is not a healthy sign, as the drop is not the result of any administrative efforts normally resorted to by governments to tame inflation,” he said.
“If prices have come down even without any concerted efforts to contain inflation, it is because people are not spending as they used to be… A deflationary trend is more dangerous for the economy.”
Housing, or rents, are the biggest single item in the basket of goods and services that the ministry tracked to compile the monthly data. Housing costs comprised 39 per cent of the price basket, followed by food and beverages with a 14 per cent share, and transportation with a 10 per cent share.
“Deflation is here, driven by a fall in rents in the UAE,” said Giyas Gokkent, chief economist at the National Bank of Abu Dhabi.
Monica Malik, a regional economist at investment bank EFG-Hermes, said she expects the 2009 consumer price index to fall by 2.4 per cent, primarily as a result of the step drop in rents.
Cheaper rents have had positive ramifications, said Sudhir Shetty, chief operating officer for global operations of UAE Exchange, a currency exchange and money transfer company.
“When rent goes down people will have surplus cash to spend for various things. Because of high rent, prices of other things went up and the consumer was paying more for all,” Shetty said.
Of the dozen different items in the ministry’s consumer price basket for April, housing fell the hardest, by 2.7 per cent from March. The price of “services” slipped by 1.0 per cent while food and beverages eased 0.5 per cent lower. In all, eight of the 12 items in the basket decreased in price from March to April.
Some analysts welcomed the data as a step toward greater openness in government accounts. “Very good. Better late than never,” said Dr Eckart Woertz, programme manager for economics at the Gulf Research Centre, an independent research institution in Dubai.
quoted from: Khaleej Times
