KFH Research: Kuwait “Inflation hits 3.0% in March 2014”

May 1, 2014 11:37 am

Kuwait’s inflation rate increased by 0.3% m-o-m in March 2014, in comparison to 0.1% m-o-m increase in February 2014. Six out of the twelve sub-components showed an increase in prices during the month, led by education (1.4% m-o-m), clothing and footwear (+0.4% m-o-m), transportation (+0.3% m-o-m), miscellaneous goods and services (+0.2% m-o-m) and home furnishings and maintenance (+0.2% m-o-m).

On an annual basis, consumer prices rose 3.0% y-o-y, up from 2.9% y-o-y in February 2014.

Inflation has now been in the 2.5 to 3.0% range for 11 months in a row, implying a fairly stable inflationary environment. ‘Core’ inflation (inflation excluding food prices) remains lower than the headline rate, at 2.6%. But, it is worth noting that the core measure has firmed up over the past 6 months, a possible sign that domestic price pressures – while still modest – are rising.

Inflation in the largest component of the CPI – rented housing (weightage of 28.9%) – stood at 3.6% in March 2014, unchanged from February 2014. Changes in this component only appear once every 3 months, and since no change was scheduled for March 2014, the figure was expected.

Food price inflation (the second largest CPI group) fell -0.1% m-o-m during the month, pushing the annual food inflation lower to 3.6% y-o-y from 4.0% y-o-y previously. Although food is an important item in the CPI ‘basket’, this move was not large enough to have a material impact on headline inflation. Details of the CPI inflation data showed prices of fresh, chilled and frozen vegetables declined by 3.1% during the month, followed by fresh and frozen fruits (-0.4%). However, the recent path of international food prices suggests that this decline may reverse in the coming months. As Kuwait imports most of its food items (approximately 90.0%) for domestic consumption, the increase was in line with upward trends in international food prices. The FAO Food Price Index grew by 2.3% m-o-m in March 2014.

Prices of furnishing equipment & household maintenance (weightage: 11.3%), increased 0.2% m-o-m in March 2014. The higher price in this category was due to higher prices of furniture, furnishings and carpets (+0.1%), as well as household goods, services and maintenance works (+0.5%). In comparison to March 2013, the group’s prices rose by 4.8% y-o-y.

As with food prices, however, the decline in housing rental inflation over the past few months has helped keep overall inflation down. Housing rental inflation has decelerated from a peak of 4.8% y-o-y last October, taking 0.4% points off the overall headline inflation rate. The relative softness of rental inflation is at odds with other evidence from the housing market, which shows activity at very solid levels.

Education costs contributed to higher price inflation, increasing 1.4% m-o-m during the month as a result of changes in the prices of pre-primary and pre-secondary education by (+1.8%) and secondary education by (+1.6%). An increase of 4.1% y-o-y occurred in comparison to education prices in March 2013.

Prices of clothing and footwear increased by 0.4% m-o-m during the month of March as a result of the rise in prices of clothing by (+0.2% m-o-m) and footwear by (+2.2% m-o-m). A 3.4% y-o-y growth was witnessed in comparison to March 2013. Transportation costs also witnessed an increase during the month, increasing by 0.3% m-o-m due to rises in the prices of purchasing vehicles by (+1.2% m-o-m). An increase of 1.2% y-o-y occurred in comparison to transport prices in March 2013.

Miscellaneous goods and services costs increased by 0.2% m-o-m as a result of changes in the prices of personal effect (+1.0%) and personal care (+0.2%). A decrease of 2.4% y-o-y occurred in comparison to miscellaneous goods and service prices in March 2013.

Tobacco and narcotics’ costs decreased by 0.1% m-o-m as a result of changes in the prices of all types of tobacco (-0.2%). An increase of 2.1% y-o-y occurred in comparison to tobacco and narcotic prices in March 2013.

Restaurant and hotel costs decreased by 1.2% m-o-m as a result of changes in the prices of catering services (-1.3%) and accommodation services (-0.5%). An increase of 2.5% y-o-y occurred in comparison to restaurant and hotel prices in March 2013.

Recreational and cultural costs have also decreased during the month of March 2014 by 0.1% m-o-m as a result of the drop in the prices of audio visual and photographic information by 0.1%. The annual inflation rate for this group has been raised by 1.2% y-o-y compared with March 2013. Meanwhile, communication costs have decreased during the month by 0.2% m-o-m as a result of the drop in the prices of telephone and telefax equipment by 1.40%. The annual inflation rate for this group has decreased by 1.3% y-o-y compared with March 2013.

On a monthly comparison, the costs of health did not change for the month of March 2014.

Kuwait Inflation Outlook 2014
We predict that consumer prices in Kuwait to continue crossing the 3.0% y-o-y mark until mid-year as accommodative monetary and loose fiscal policy should underpin domestic demand, driving price pressures. In addition, some of the factors – such as soft food prices and other base effects – that have been keeping inflation low previously may start to unwind. Wage rises may also exert upward pressure on inflation in 2014 and beyond. Nevertheless, the country’s extensive subsidy system and price controls will help to keep prices in check. We project Kuwait’s inflation to grow by 3.5% in 2014 (2013: 2.7%).

We expect inflation in the GCC to pick up again in 2014 to around 3.2% (2013: 2,8% y-o-y) as rents continue to rise, international food prices stabilize, credit growth increases and heavy public investment drive up inflationary pressures. However, this is far from the double-digit inflation experienced in 2008 (11%), which was partly driven by higher international food and fuel prices.

CPI in other countries has been subdued, while Kuwait’s has been rising. In comparison to GCC peers – Saudi Arabia and Bahrain, Saudi Arabia’s March inflation edged down to 2.6% y-o-y from 2.8% y-o-y in February 2014 and Bahrain’s March inflation dropped to 2.3% y-o-y from 3.7% y-o-y in February 2014.

Saudi’s March inflation rate fell for the fourth consecutive month. On a monthly basis however, inflation increased slightly to 0.2%, up from a two-year low of 0.1% in February 2014. Lower food price inflation attributed largely to the CPI decline but rental inflation increased slightly. As domestic wholesale food inflation remained at a decline, the decrease in inflation was expected. With food accounting for the largest proportion of the cost of living index (21.7%), this decrease was enough to lower headline inflation despite the increase in rental inflation; unlike Kuwait’s slowdown in food and beverages which was not enough to lower headline inflation.

Bahrain’s March inflation witnessed a slowdown as housing costs increased 1.9% y-o-y but stayed flat m-o-m. Prices of food and beverages, which account for 16% of the basket, rose 5.4% y-o-y but fell 0.3% m-o-m. Food accounted for declines in inflation for both Saudi and Bahrain, but not for Kuwait.