JEDDAH: Saudi Arabia’s consumer price index (CPI) continued to edge downward in January, recording the first negative year-on-year growth since 2005, at -0.4 percent, Jadwa Investment said in a report issued on Sunday. Prices of foodstuffs continued to fall, declining by 3.6 percent year-on-year in January, it said. Meanwhile, housing continued to be the main contributor to overall inflation. “Our core index estimate also continued to decelerate year-on-year, reaching 0.6 percent in January. Looking ahead, government initiatives aimed at stimulating private sector activity should have a positive impact on aggregate demand, and therefore inflation,” said Jadwa researchers. They said that the planned increase in household electricity prices by mid-2017 should accelerate inflation to similar levels witnessed in early 2016, when energy prices were increased.
According to the report, the sharp slowdown in headline inflation was mainly due to the diminishing effects of the reform in energy prices seen back in January 2016. However, even in month-on-month terms, CPI recorded a negative change of -0.2 percent. Prices of foodstuffs, the largest weight in the CPI basket, remained in the negative territory for the 6th consecutive month, both year-on-year and month-on-month terms. Conversely, the report added, housing and utilities recorded a positive year-on-year change of 1.2 percent, but on a month-on- month basis growth was negative. Researchers at Jadwa said that their estimate of core inflation, which excludes food, rent and other housing services, slowed to the lowest level in 10 years, from 2.3 percent in December, to 0.4 percent in January. This was a result of a negative year-on-year change in the transport segment. Prices of food and beverages shrunk by 4.2 year-on-year in January, recording a sixth consecutive monthly year-on-year decline, and bucking the trend in global food prices.
Domestic food prices have been declining since mid-2016, partially due to a strengthening riyal, in line with the US dollar, which has contributed to lowering the import bill in recent months. As a result, the value of imports fell by 20 to 30 percent year-on-year in recent months. Also, a number of bans on meat and poultry have been lifted by the authorities from certain countries in the last few months, the imposition of which had previously driven up domestic prices. The report concluded that a strong US dollar and weak global economic growth should lessen the impact of external conditions on domestic inflation. “The January rise in custom duties on food imports should put pressure on prices in coming months. Looking further ahead, the imposition of excise taxes on harmful food products in the second quarter of 2016 should also result in a pick-up in domestic inflationary pressure,” said the report. Meanwhile, the inflationary impact of the new round of energy price reform to be implemented in Q3 2017 will be most apparent in the housing and utilities segment. Another likely pressure point on inflation toward the end of 2017 will come from rising demand for consumer products ahead of the scheduled implementation of value-added tax (VAT) in early 2018.
