Inflation reaches 2%, a 10-year low

Good news for consumers and the economy as housing prices and utility costs fall and some analysts say deflation may be on way.

The first government release of month-by-month UAE economic data yesterday shows a levelling in the cost of living and the lowest rate of inflation in nearly a decade - figures that could benefit both consumers and the economy as a whole, experts say.

Since the beginning of the year, the annual rate of inflation has slowed to just 1.9 per cent from 7.2 per cent, the Ministry of Economy reported. Until the financial crisis hit late last summer, soaring inflation rates were the main economic bugbear in the Gulf, as prices spiralled upwards on the back of high oil prices and rapid economic growth, threatening to destabilise economies. Since then, oil and commodity prices have fallen while property prices have dropped considerably in places like Dubai, which saw a 65 per cent decline from their peak in September, HSBC said on Sunday.

"The issue now is how long this period of weak prices plays out for. The main question is whether housing prices continue to fall or start to stabilise," said Tim Fox, the chief economist at Emirates NBD, the largest UAE bank. Housing and utilities costs, which make up nearly 40 per cent of the basket of goods and services that the Government uses to measure inflation, showed the biggest declines. The category's price index fell by nearly 5 per cent during the first four months of the year. Food and beverage prices increased, but at a much slower rate than that of a year earlier.

But regardless of what the numbers show, they marked an important milestone for the Government, which has long been criticised by bankers and economists for not releasing price information frequently enough. The new figures are broken down by month - a first for UAE inflation data - and are calculated using an up-to-date basket of goods to represent residents' average expenditures. The most recent official figures before yesterday's showed inflation of 11.1 per cent in 2007 based on a basket of goods calculated in 2000.

"This data gives new scope for policy makers. It's useful," said Giyas Gokkent, chief economist at National Bank of Abu Dhabi. "Before, it was mostly guesswork in terms of what some of the parameters were. Now you might have a better picture and be able to anticipate certain economic trends beforehand." Some analysts say falling property prices and cheaper food and drink could mean the cost of living actually decreases this year - a situation known as "deflation".

"We are predicting deflation for this year, driven by falls in rents and food prices," Mr Gokkent said. Economists say such deflation would not usher in a period of economic malaise similar to that suffered by Japan in the 1990s, which also witnessed a period of deflation. Because of the UAE's relatively young population and expectations of continued economic expansion, any period of deflation would probably be temporary, and more of an economic curiosity than a symptom of problems.

Annual inflation in January stood at 7.2 per cent, slowing to 6.2 per cent in February, 4.5 per cent in March and 1.9 per cent in April, according to the Ministry of Economy figures. In 2008, the average rate of inflation was 12.3 per cent. It peaked at 13.5 per cent in the second quarter of that year. .
[e-mail] * With Additional reporting by Sarmad Khan and Uta Harnischfeger