Global food prices hit record high on UN index

Analysts say weakness in the UAE's housing market should help to keep inflation from reaching the peaks of 2008, as one big retailer suggests shops will hold off on rushing through price rises.

Sugar is among the items in the FAO's food price index, which also includes dairy products, meat and cereals.

Global food prices reached a record high last month, the latest data from the UN Food and Agriculture Organisation (FAO) show.

The FAO's food price index, which incorporates the average prices of meat, dairy products, cereals, cooking oil, fats and sugar, reached 215 points, up 25 per cent from the same month in 2009 and higher than the previous record of 213.8 points in June 2008.

Steep increases in the cost of sugar spurred the rally, as well as higher market prices for oils and fats and cereals, FAO data show.

Jarmo Kotilaine, the chief economist at NCB in Saudi Arabia, said: "The market has gone haywire. There is little room for manoeuvre when the harvest doesn't meet expectations and unpredictable market volatility is bad news for the Gulf."

Price rises by Coca-Cola and Pepsi for their products, which came into effect this month, provide the latest sign of rising commodity prices in the UAE.

Retailers in the country say prices for staples such as oil and sugar have risen but not yet reached "extraordinary" levels.

Food prices were high on the agenda of UAE consumers in 2008, when a surging crude oil prices pushed up the cost of commodities such as rice to 20-year highs. That year, inflation reached a record 12 per cent.

The GCC is particularly vulnerable to fluctuations in global food prices as it imports around 85 per cent of its requirements, one of the biggest components of the consumer price index officials use to determine inflation rates.

Such fluctuations pushed the Government in mid-2008 to sign agreements with local retailers to freeze prices of basic food commodities.

The cost of foodstuffs began to drop in 2009, however, as the effects of the global economic downturn set in. But rising global food prices were the biggest culprits behind an increase in regional inflation last year.

Prices began to rise sharply in the second half of the year because of a combination of poor harvests in Russia and Pakistan, stockpiling by large countries such as China and India, and trade barriers leading to supply pressures.

Prices in the UAE crept up 1.04 per cent in the first 11 months of last year compared with the same period the year before. The slight rise masked bigger jumps in the cost of basic foods.

The price of sugar, jam, honey, chocolate and confectionery surged by almost a third in Abu Dhabi in the first nine months of last year.

Concerns are growing that pressures on global stocks this year could be exacerbated by floods in Queensland, Australia, a leading exporter of wheat and livestock.

But analysts say weakness in the UAE's housing market should help to keep inflation from reaching the peaks of 2008.

Georges Mojica, the general manager of the Abu Dhabi Co-operative Society, said he expected consumers to feel the pinch in the second half of this year. Retailers would try to hold off raising their prices, so as not to push their customers towards the competition, Mr Mojica said.

"There is competition on the shelves, competition in terms of other retailers. You don't want to start putting up the price. You wait until the last moment," he said.