Gulf Arab inflation showed signs of moderating on Tuesday after months of rapid rises drove it to record levels, but pressures from elevated food and housing costs threaten to plague the region for years. Kuwait's red hot inflation cooled slightly in May while Bahrain price rises steadied, new data showed, one day after money supply figures from Saudi Arabia, the Gulf's biggest economy, indicated that price pressures may wane.
Inflation has been a source of stress in the Gulf, where most states rely heavily on migrant labour. In Kuwait, hundreds of Bangladeshis went on strike this week seeking better pay, while workers have rioted in the UAE and Bahrain over wages lost to the tumbling dollar. Inflation in Saudi Arabia, Kuwait and three other states in the world's biggest oil-exporting region began accelerating in the second half of last year, soaring above 10 percent in all states in the first half of the year.
Headline inflation rates would likely begin to level off on Gulf government measures to control rent rises, new housing supply and lower global food price increases, analysts said.
"Inflation cannot continue to go up at such a rapid pace," said Paul Gamble, head of research at Jadwa Investment. "Increases in food and commodity prices have slowed down now. But the worst isn't over. It's going to take a number of years for it to go down significantly." In Kuwait, inflation eased slightly to 11.1 percent in May after five months of rises took it to a record 11.4 percent in April, government data obtained by Reuters showed on Tuesday.
Kuwait broke ranks with its Gulf neighbours preparing for monetary union in May 2007 when it severed its currency's link to the weak US dollar to tackle imported inflation. Prices in Bahrain, the smallest Gulf economy, also stabilised at 3.1 percent in June, the state's Central Informatics Organisation said on Tuesday. Data showed food prices fell 6 percent in June from the month earlier. Dollar pegs in most Gulf states have driven up import costs as the US currency fell to record troughs against the euro as recently as this month.
They've also forced the Gulf to track US interest rate cuts even though their economies are soaring on a more than six-fold rise in oil prices since 2002. "Inflation will continue to be driven by rents and food. But prices are beginning to stabilise at higher levels," said Monica Malik, an economist at EFG-Hermes investment bank. "In the second half of last year, inflation was rapidly picking up across the Gulf, so you would have this base effect kicking in," she said.
PRICE PEAKS: Gulf governments have increased price controls, boosted subsidies and cut import duties on some goods to cool down prices, while also raising employee wages. In top oil exporter Saudi Arabia, inflation more than doubled in the seven months to April to 10.5 percent - the highest level since at least the oil boom of the 1970s. Between 2000 and 2005, inflation was less than 1 percent in the kingdom.
Saudi inflation eased slightly to 10.4 percent in May, and price rises are likely come off in the second half of the year, the Saudi central bank governor has said. Echoing those comments, Oman's deputy central bank chief said this month inflation probably hit a peak at a record 13.2 percent in May.
Growth in money supply, an indicator of future inflation, is beginning to ease after Gulf central banks tightened lending curbs this year. Saudi Arabia's annual money supply growth eased slightly in June, data on Monday showed, while Kuwaiti money-supply growth was the slowest in a year in June and Bahrain's grew at its slowest pace in eight months in May.
"While the increase in the headline rate has reached close to its peak, barring any unforeseen shocks, it is still going to be there," said Gamble, who expects Saudi inflation to average 8 percent this year, 6 percent next year and 5 percent in 2010.
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