Decline was due to lower rents after rebounding house supply

Lower housing prices due to higher supply depressed inflation in Saudi Arabia last month to its lowest level this year and it was the first time it dipped below five per cent in 10 months, according to a local investment firm.

Extending a decline in the previous months, year-on-year inflation eased in June, slipping to 4.9 percent from 5.1 percent in May, “the first time it has been below five percent since August 2011,” the Riyadh-based Jadwa Investments said.

“Lower rental inflation caused most of the fall. Rental inflation fell to its lowest level this year in June, suggesting that more new housing stock is entering the market,” it said in a study sent to Emirates 24/7.

It showed rents for flats continue to outpace those for villas, growing at 12.3 percent and seven percent in year-on-year terms, respectively.

“We do not think that the recently-approved mortgage law will have a short-term impact on rental inflation,” the report said.

It showed clothing and footwear was the only component of the cost of living index to post higher inflation in June than in May, and this was only a small rise. In most of the other sectors where consumer spending plays an important role in price movements, inflation was down, it said.

Year-on-year inflation has now fallen for four consecutive months, as external price pressures have eased and domestically driven sources of inflation appear to have peaked, at least for the moment, it added.

“We think that a temporary pick-up in inflation may happen in July and August owing to the jump in food prices that tends to occur ahead of and during the fasting month of Ramadan,” Jadwa said.

It noted that the monthly increase in food price inflation in the month that Ramadan starts has averaged almost five times higher than for the other eleven months of the year since 2002.

In July 2011, food price inflation was one percent, compared to an average of 0.3 percent for the remainder of the year, it said.

Jadwa projected annual inflation in Saudi Arabia, the largest Arab economy and the world’s oil basin, would edge up slightly to around 5.2 per cent this year from five per cent in 2011 and 5.3 per cent in 2010. The level was around 5.1 per cent in 2009 and as high as 9.9 per cent in 2008 due to high oil prices, strong domestic demand and a weakening in the US dollar, to which the Saudi riyal and other Gulf currencies are effectively pegged.

source: emirates247