Inflation rise to pinch shoppers

Consumers will feel the impact of higher manufacturing and transport costs in their pockets as new inflationary pressures hit home.

Everything from rising production costs to increased transport prices will hit consumers.

Shoppers are set to feel the impact of higher manufacturing and transport costs in their pockets as new inflationary pressures hit home. The cost of living has already started to rise, according to fresh data from across the region. "Inflation is returning back to the UAE," said Tudor Allin-Khan, the chief economist at HC Brokerage in Dubai. "You've got a global rise in commodity prices, a global rise in demand and people demanding the cost of their wages to reflect this higher cost of living.

"And because end consumers are now demanding goods and services, the producers are passing on those additional costs." UAE inflation is now running at about 1 per cent, or more than twice the rate of six months ago, but below the peaks of 2007 and 2008. Regional governments are also reporting accelerating inflation. Egypt's core annual inflation last month stood at 7.08 per cent and rose 1.52 per cent in the month from June, the central bank said yesterday.

The inflation rate in Oman reached a one-year high of 3.5 per cent in June, up from 3.2 per cent in May. Kuwait's inflation rate accelerated to 2.9 per cent in May, up from 2.8 per cent in the previous month, it said this week. Saudi Arabia's inflation accelerated to a 13-month peak in June, powered by food and housing costs. The kingdom's inflation rate rose to 5.5 per cent in June from 5.4 per cent in May.

"There's always an element of seasonality so inevitably there's a pick-up during Ramadan," said Simon Williams, the regional chief economist at HSBC. Mr Williams said he expected inflation to stay at between 1 and 2 per cent in the UAE and Qatar this year as weak credit growth and low demand in the property market helped to control inflationary pressures. Mr Williams expected inflation in Saudi Arabia to stand at about 6 per cent due to less spare capacity within the property and labour markets.

But with the recent soaring price of wheat after poor harvests in Russia and crude oil now priced above US$81 a barrel, regional consumers are likely to increasingly feel the pinch in the coming months. This year's rise in fuel prices in the UAE, which amounts to as much as 27 per cent depending on the grade, will further increase transport costs and push up the price of food and consumer goods, said Mr Allin-Khan.

"Goods need to be transported around the world and they need to be transported once they get to the country by lorries," he said. The rising price of key commodities such as cotton is also putting pressure on retailers' bottom lines. The cost of cotton has risen 40 per cent in the past year, from 60 US cents a pound to 84.5 cents a pound. The steep rally stemmed from a shortage of supply and increased consumer demand from the US and China, said Abah Ofon, a soft commodities analyst with Standard Chartered in Dubai.

Keith Flanagan, the general manager of Al Ghurair Retail, which has the regional franchise for brands such as Springfield clothing, said it was likely he would have to raise prices by early next year. The cost of stock for the spring/summer collection, which many retailers buy at this time, has gone up by between 10 and 40 per cent, depending on the cotton content, Mr Flanagan said. "Now there is a global demand for cotton that was not there 12 or 18 months ago."

That rebound in consumer appetite has also helped to drive up freight prices, said Philip Damas, the director of Drewry Supply Chain Advisors, based in the UK. The price of shipping a 40-foot container to Dubai from the UK has jumped almost 40 per cent to $1,800 (Dh6,612) from $1,300 a year ago, he says. Shipping the same sized container from the US to Dubai has also increased in price to $1,400 from $1,300 a year ago. But the cost of shipping between Dubai and China has remained flat as companies have increased the number of available containers on the route.

But increasing wages in factories in China, long a source of low-cost labour, has pushed up manufacturing expenses for the retailers who source their goods there. A series of strikes in provinces such as Guangdong has prompted the Chinese government to raise minimum wages from July 1. Salaries in China make up a small portion of the overall manufacturing costs but analysts say the increases signal a long-term shift.

Eros Group, a Dubai-based electronics retailer and distributor of brands such as Samsung, has seen the price of some of its goods increase by up to 5 per cent, said its chief executive Deepak Babani. Eros has started passing on these costs to its dealers, Mr Babani said. "We need to increase because otherwise it is hurting the bottom line." [e-mail]