Kuwait inflation up 4.4% in Q2 but expected to slow down as global pressures ease

Factors such as high food prices and supply chain bottlenecks have contributed to the rise in the consumer price index

Kuwait's economic growth is expected to accelerate to 5.7 per cent in 2020 due to oil output that is expected to be 8.6 per cent higher this year. Bloomberg

Inflation in Kuwait rose in the second quarter of 2022, but is expected to trend lower in the second half as global price pressures ease, the National Bank of Kuwait has said.

The Gulf nation's consumer price index expanded 4.4 per cent annually in the three months ended June, attributed to global factors such as high food prices and supply chain bottlenecks, the lender said in an economic update released on Saturday.

However, it was unchanged from the first quarter and was slightly lower than April and May, but still elevated by global standards.

Gains made by the Kuwaiti dinar, in line with a stronger US dollar, are also helping to contain general price pressures through lowering import prices.

The dinar has also risen against major currencies so far in 2022, including the Chinese yuan (4 per cent), euro (10 per cent) and Japanese yen (16 per cent).

NBK expects inflation to slow down in the second half as some global pressures ease, monetary policy is tightened further and as big price increases last year fall out of the annual comparison, it added.

"Upside risks to inflation include a fall in the US dollar, which could push up import prices in Kuwait, or a pick-up in housing rents, which have been stagnant this year," NBK said.

"Downside risks include lower food international prices, an easing in global supply chain pressures and slower domestic economic growth if oil prices were to fall."

Kuwait exited a two-year recession in 2021 as real gross domestic product grew 2.3 per cent, following a Covid-19-induced 8.9 per cent contraction the year before 2020, the World Bank estimates.

The Opec member's 2022 economic growth is expected to accelerate to 5.7 per cent due to oil output that is expected to be 8.6 per cent higher this year, it added, noting that the country's fiscal deficit is expected to narrow with higher crude prices.

The food component of the CPI continues to be a key driver of higher inflation, rising to 8 per cent in June compared to March's 7.2 per cent. The prices of most food sub-categories increased in the second quarter, but at slower rates compared to the previous three-month period.

However, NBK said lower international food prices could help slow down domestic increases going forward, citing the latest report from the UN Food and Agriculture Organisation (FAO).

The FAO last week said that world food prices posted their steepest monthly decline in almost 14 years, led by substantial drops in the cost of vegetable oil and cereals.

The housing services index, which historically changes at the end of each quarter, showed no change for the second successive quarter, cutting the annual rate slightly to 2.2 per cent.

NBK had previously identified this sector as "pivotal" for overall inflation prospects in 2022, given its large 33 per cent weight in the CPI basket and its "clear strengthening" the second half of 2021.

"Data so far, however, suggest that this momentum has not been sustained in 2022, so contributing less to inflation than had been expected," it added.

Core inflation, which strips away food and housing, remained historically high but slowed slightly to 4.5 per cent in June from 4.7 per cent in March.

For the first half, inflation in Kuwait averaged 4.5 per cent, which was the highest in several years. However, it remains well below current rates in major overseas markets, including the US (8.5 per cent) and the Eurozone (8.9 per cent), as the economy is supported by price controls and subsidies in fuel and energy.

"On the downside, global food and commodity prices could fall further and more rapidly than anticipated as global growth weakens, cutting domestic food prices. Lower oil prices would also affect the growth outlook for the Kuwaiti economy, probably reducing inflationary pressures," NBK said.

"A weaker world economy would unwind some pressures on global supply chains, reducing inflationary pressures from this source as well."

Kuwait's emir on August 1 issued a royal decree to establish a new government made up of 12 ministers — down from 15 as some have taken additional portfolios — to be led by Prime Minister Sheikh Ahmad Nawaf Al Sabah.