JEDDAH – Saudi CPI inflation falls to a four-year low of 2.8 percent year-on-year in February compared with 2.9 percent in January, Jadwa Investment report said Sunday. The core inflation also fell to below 1.5 percent for the first time since April 2011. As expected, food inflation maintained a downward trend, hitting a 15-month low in February. Housing inflation continues to hover in a closed range as the market anticipates the impact of government housing initiatives. International conditions provide a benign backdrop to inflation in the Kingdom though any downward pressure is likely to be limited given strong domestic inflationary factors. The Central Department of Statistics and Information (CDSI) released Consumer Price Index (CPI) inflation data for February, showing annual headline inflation hitting a four-year low of 2.8 percent compared with 2.9 percent in the previous month. On a monthly basis, inflation also eased to 0.1 percent in February compared with 0.2 percent in January. Jadwa estimate of Saudi core inflation, which excludes food and rental and housing-related services, slipped to 1.4 percent year-on-year compared with 1.6 percent in January. Core inflation was pushed down by falling prices of the other goods and services group. The prices of the latter contracted by 0.4 percent year-on-year in February owing mainly to falling jewelry prices, which contracted by 16 percent year-on-year, following a similar fell in international gold prices in February compared to its level a year earlier. As expected, food inflation slowed to 4.6 percent year-on-year in February compared with 5 percent in January putting the food inflation at its lowest level since November 2012. Looking forward, there is little reason to expect a major rise in domestic food inflation over the coming few months for two main reasons. First, wholesale food price inflation eased to 1 percent year-on-year in February, down from over 2 percent few months earlier. Second, prices of many agricultural staples have risen since the end of January, but benchmark agricultural commodity price indices are still lower than they were a year ago. The IMF food price index slipped by 3.4 percent year-on-year and the FAO index by 2.1 percent in February. At 4 percent year-on-year in February, housing inflation continues to hover in a closed range between 3.5 percent and 4.2 percent since July last year. Jadwa believes this lack of direction in housing inflation is mostly due the uncertainty in the market as both developers and consumers await the impact of different government initiatives that aim to revive the sector with more favorable policies including a proposed tax on unused land. As highlighted in previous inflation updates, we anticipate housing inflation to gradually trend downward as new supply of housing units balances the market, though further delays in the government housing initiatives is likely to keep rental inflation high. This gradual downward trend in domestic inflation since end of November last year is in line with inflation rate in major trading partners. In fact, inflation is currently below target in nearly all the major economies. In the US, headline inflation rose slightly to 1.6 percent year-on-year in January, after dipping below 1 percent a few months earlier. In addition, market expectations of inflation remained low and stable in many advanced economies where there is ample capacity surplus. Inflation in most emerging economies is set to remain relatively low despite recent significant currency depreciations which affected only a small number of countries. In China too, inflation fell to just 2 percent in February owing mostly to lower food inflation, but the core index also fell. While the external factors contribution to inflation in the Kingdom will remain subdued, we expect domestic inflationary pressure to remain relatively strong. High consumer spending, exceptionally low interest rates, rising demand deposits and bank lending and recent labor market reform will keep an upward pressure on domestic prices. Latest monetary data show the growth of demand deposits hitting a 10-month high of 4.3 percent month-on-month in January. — SG
