Saudi Arabia and Qatar may see an uptick in their inflation rates due to tightening real estate markets, though most economists remain sanguine about price pressures in the Arab Gulf countries. Saudi rents and property prices are rising as the kingdom struggles with a housing shortage, which could push the kingdom's annualized inflation rate as high as 7 percent later this year, up from 5.2 percent in 2011. A government plan to build 500,000 new homes won't be completed soon enough to mitigate inflationary pressures in the near future. "(Housing) demand will continue to exceed supply, and inflation will continue to be higher on that account," said Khaled Abdulla, a Dubai-based economist and lecturer at Rochester Institute of Technology. Prices in some Saudi cities are expected to rise 10 percent in 2012, due to housing shortages and generous social aid packages provided by the Saudi government, according to Matthew Green, head of research at real estate company CB Richard Ellis in Dubai. Saudi inflation edged up to a 14-month high of 5.4 percent on an annual basis in February, mainly because of higher food and housing costs, state news agency SPA reported on Sunday, quoting data from the Central Department of Statistics. Compared to the previous month, consumer prices increased by 0.3 percent after a 0.1 percent rise in January. Saudi inflation accelerated to 5.3 percent in 2010 from 5.1 percent in 2009, still below a record high of 9.9 percent hit during the oil-boom and global crisis year of 2008. Rental costs, together with food prices, make up a major part of the consumer price baskets from which inflation rates are calculated in the Gulf states. In Saudi Arabia, for example, rental costs alone constitute nearly 40 percent of the cost of living index. In Qatar, falling property prices are still acting as a drag on inflation, with rental rates dropping 9 percent in the last quarter of 2011 compared with the same period a year earlier. But that could change in coming years as rental prices stabilise and the government embarks on massive infrastructure spending plans ahead of its hosting of the World Cup soccer tournament in 2022. The IMF warned recently that Qatar's average consumer price inflation could rise to 4 percent or 5 percent in the medium term "as rents stabilize due to a gradual decline in excess capacity in real estate, and as the implementation of large investment projects lead to some overheating pressures." The IMF urged Qatar to keep a close eye on the effects on demand of the country's expansionary fiscal policy. But economists don't see the building inflationary pressures in the Kingdom and Qatar as a threat of the same order as in 2007, when rising food prices combined with a buoyant real estate market to push Saudi inflation into double digits – peaking at 11.1 percent in July 2008 – and raising speculation the Kingdom might break the Saudi riyal's dollar link.
