Keep a steady eye on inflation rate

A 3.1 per cent inflation rate is a signal of a strengthening economy, but rising prices for food and energy bear watching.

Recent hikes in the price of food, transport and housing drove Abu Dhabi's inflation rate up to 3.1 per cent in February,The National's Business section reports today. There may be reason for caution in the long term, but it is actually good news for now. That steady rate of inflation - it rose by just 0.1 per cent since January - is a bellwether of an increasingly diversified economy. Simply put, some inflation is consonant with growth.

After the global financial crisis in 2008 and 2009, that growth had all but disappeared. "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," Tarek Coury, an economist at the Dubai School of Government, warned at the time as a recession loomed.

The latest figures are reassuring that the danger of another slump is lessening. Steering back to a general trend of growth shows that the economy is not only continuing the recovery, but doing so in the uncertain political climate of the region.

But there are areas that need to be closely monitored. Food and housing in particular raise a note of caution because of the immediate impact on the welfare of lower income households. The UAE's Consumer Price Index, a weighted basket of goods that measures inflation, is not only a macro-economic indicator, but also a yardstick that measures whether individual households can make ends meet. According to the Statistics Centre Abu Dhabi, food prices have already risen by almost 10 per cent.

Rents in Abu Dhabi are also another concern as they make up about a third of household budgets. Rents rose by 3.4 per cent in the first two months of this year when compared with the same period last year, although new supply that come on to the market might have an effect.

The added regional uncertainty over energy supply has meant that transport costs have also taken a knock. While overall inflation was moderate, transportation costs rose by more than 11 per cent. If unchecked, that can carry over into other areas of the economy.

These are areas were the Government could step in if needed. For now, it is not. A 3 per cent rate of inflation is well within bounds as long as it is outpaced by growth.