JEDDAH — The sharp declines in consumer prices in Saudi Arabia and the UAE are largely a base effect, as these countries introduced a value added tax at a rate of 5% in January 2018, Indosuez Wealth Management’s MACRO PULSE report released last April 25 said.

The direct impact of this decision on the price level is now dissipating. Furthermore, the oil price rebound seen thus far in 2019 is also impacting inflation, pushing the CPI higher.

“Two months ago, we refuted the idea that the Gulf Cooperation Council (GCC) countries had entered an era of deflation and the latest figures for March confirm our analysis. While still significantly negative, the bottom appears to have been reached, and the deflationary trend has arguably started to reverse,” it noted.

In March 2019, the year-on-year (YoY) consumer price deflation was 2.1% in Saudi Arabia (up from -2.2% in February), and 1.2% in Qatar (up from -1.4%). We await the March data releases for the United Arab Emirates (UAE) and Dubai. February inflation rates were still negative in Dubai (-3.9% YoY) and in the UAE (-2.5% YoY).

On the other hand, global food prices have been falling since July 2017. They were down 3.6% YoY in March in USD terms. However, assuming that food prices will remain at their March level by December, it would translate into a YoY rise of 3.4% and thus add to inflation after all.

This year, the month of May more or less corresponds with the holy month of Ramadan in the Islamic calendar. Could this fact have an effect on the current spate of deflation? Various academic papers have attempted to verify whether the price level tends to rise in Muslim countries during Ramadan. Increased demand for food and gift items could conceivably lead to prices hikes.

“Looking at the data (until 2013), we can observe that there were not any abnormal monthly variations in consumer prices during Ramadan in all studied countries, except for two – Morocco and Saudi Arabia. However, the econometric analysis carried out with respect to the latter country did not show a statistically significant Ramadan effect,” the report noted.

Not being able to identify a “Ramadan effect” does not necessarily mean that there is no upward price pressure linked to the holy month. Maybe price hikes occur before the start of Ramadan, or prices of essential food items are regulated by the government during the month. — SG