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The GCC will need to make peace with inflation settling higher

Gulf inflation will be more benign but looks set to persist into 2024

Labourers unload rice; restrictions may result in higher inflation Reuters
External factors such as India's ban on rice exports could result in rising food prices in the Gulf

As regional inflation eases slightly faster than expected, the GCC is in lockstep with much of the rest of the world.

Dubai’s inflation rate dropped to 2.1 percent in June, down from a peak of 7.1 percent last year and its lowest value since January 2022. Most other GCC countries are also seeing softened inflation rates.

The good news is that immediate pressures look set to ease further. The purchasing managers’ indices (PMIs) for Qatar, Saudi Arabia and the UAE all suggest that output price inflation continued to fall. 

Moreover, global supply chains and commodity prices are feeding softer inflation dynamics. Even with Brent crude oil prices climbing back above $80 per barrel, they are still more than 20 percent lower than this time last year. 

Fuel prices have been a major factor in the easing of GCC inflation. Dubai transport prices – which include petrol – declined 13.9 percent in June on a year earlier. 

However, the impact of softened fuel prices will lessen throughout the year. The current level of oil prices is only around six percent below the average for the fourth quarter of 2022 and this will be reflected in the slowing annual decline of petrol prices.

A similar narrative can be applied to food prices. The UN Food and Agriculture Organization Food Price Index was down 21.5 percent year on year in June. This annual decline would fall to single digits if food prices remained similar to current levels for the rest of the year. 

There is also a risk that food prices could rise following Russia’s decision to exit from the Black Sea Grain Initiative, India’s ban on rice exports and the weather implications of warming sea waters resulting from the El Niño phenomenon.

Regional rise 

Taken together, international developments suggest that GCC inflation will edge up later in 2023, potentially into early 2024. However, with the currently more stable geopolitical landscape, global commodity prices are less likely to cause gyrations in regional headline inflation rates.

As international prices stabilise, domestic factors will come to the fore in determining GCC inflation rates. As the Gulf is one of the fastest-growing regions in the world, one consequence is that local inflationary pressures will rise. 

Although wage costs seem to be rising, the region’s relatively fluid labour markets that can draw in expat workers, means domestic price pressure builds up through demand for housing and services rather than through the labour market. 

Hot housing market

Housing, which makes up an average of 27 percent of the region’s consumer basket – almost as much as food and transport combined – is exerting upward pressure on headline inflation rates.

This is primarily a result of higher rental prices, especially in Dubai and Saudi Arabia, where inflation in the housing sector hit an all-time high of 9.1 percent year-on-year in June.

The property market is expected to continue to boom in parts of the Gulf. Dubai became the world’s leading luxury residential market in the first half of 2023 and overall property transactions were also up strongly. 

These headline factors have contributed to Dubai residential property prices’ increasing by 16.9 percent year-on year in June, according to data from analyst Reidin, while strong demand is also fuelling rental increases of 22.3 percent year-on year. Much of this is still to feed through to inflation as tenants do not all renew at the same time.

Although lacking some of the fizz seen in Dubai, Abu Dhabi residential and commercial property markets are also seeing increased demand and rising prices. Rental prices will likewise firm in the rest of the GCC, spurred by higher demand from nationals and expatriate workers. 

The robust outlook for the non-oil sector across GCC will support hiring across the region and draw in foreign workers. 

Housing demand will also be bolstered by new visa rules and reforms to regulations governing foreign ownership such as recently announced measures in Saudi Arabia. This will sustain higher housing costs and the contribution of housing to overall inflation.

We expect inflation across the GCC to average 2.7 percent this year and 2.5 percent in 2024, compared with 3.3 percent last year. The strength of domestic activity in the region and buoyant real estate markets, as well as potential for volatility in international markets, creates some upside risk.

Despite this more benign inflation outlook, GCC residents will need to make peace with inflation settling higher than they had become used to before the global pandemic. 

Scott Livermore is chief economist at Oxford Economics Middle East

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