JEDDAH: Saudi Arabia’s food inflation turned negative in July for the first time since the start of 2010, according to data analyzed by Jadwa Investment. Consumer price index data for July showed a deceleration in prices to 3.8 percent year-on-year compared to 4.1 percent in June, the four consecutive month of declines. Jadwa said in a statement that the decline was, in part, the result of the subdued level of economic activity so far in 2016. It added that it maintains its forecast for annual average inflation of 3.9 percent for 2016. While food inflation turned negative for the first time since January 2010, while housing inflation remained as the main contributor to overall inflation during July.
The Jadwa report said core inflation, which excludes food and rent and other housing services, also slowed in July, reaching 3.9 percent year-on-year compared to 4.3 percent in June. The contribution of housing prices to overall inflation rose to 49.4 percent, its highest since December 2011, while core inflation saw its contribution decline to 51 percent, down from 53.6 percent recorded in the previous month. “It appears that persistent deflation in international food prices have finally set into domestic foodstuffs. We believe that the recent move by authorities to facilitate imports of food products from various destinations has had a significant impact on domestic foodstuffs, which have turned negative, year-on-year,” Jadwa added.
Housing inflation recorded an acceleration in July to 7.5 percent, up from 7.2 percent in June as rentals rose to 3.4 percent year-on-year in July, up from 2.9 percent recorded in the previous month. “While this still reflects elevated demand for rentals amidst a shortage of housing units, it is lower than the same period last year,” Jadwa said. Nearly all subgroups of the core index posted a year-on-year slowdown in July. Year-on-year inflation for clothing, transport, and furnishings slowed to 4.2 percent, 9.4 percent, and 2 percent respectively.
Meanwhile the year-on-year deflationary trend in the restaurants and hotels subgroup continued with -1.6 percent in July. While external factors’ contribution to inflation will remain subdued, particularly due to a stronger US dollar and weaker global economic growth, domestic inflationary pressure is expected to be subdued for the remainder of 2016. Domestic price pressures should be alleviated by the negative growth in broad money supply (M3), which is in part due to falling bank deposits. Foodstuffs with the highest weight in the CPI basket has been on a decelerating trend since July 2015.
Jadwa said housing inflation will remain the main contributor toward overall inflation, with the increase being driven by strong domestic demand for housing units. The combination of these factors will keep forecast for an average annual inflation rate at 3.9 percent for 2016.
