Inflation proves a tough nut to crack for Saudis

Saudi Arabia has few policy tools to tackle rising inflation in the kingdom after it reached its highest point in 17 months, caused in part by Ramadan along with higher global commodity prices, says Banque Saudi Fransi. Rising domestic demand and the increased cost of imports pushed food and beverage inflation up to 7 per cent in July from less than 1 per cent in December, said a report by the bank.

Food costs can fluctuate during Ramadan as many residents stock up on basic staples such as rice, bread and sugar. Date prices had risen about 10 per cent, with meat prices increasing by between 7 per cent and 15 per cent, anecdotal evidence showed. Food and beverages have the biggest bearing on the consumer price index, representing about 26 per cent, followed by rental costs and utilities at 18 per cent.

"There is little that the Saudi Arabian Monetary Agency [SAMA] can do with monetary policy manoeuvring at this stage to quell accelerating price pressures that led inflation to accelerate to 6 per cent in July from 5.5 per cent in June," said John Sfakianakis, the chief economist at Banque Saud Fransi. "The rate of inflation in Saudi at the moment has nothing to do with monetary fixing as the principal drivers of inflation are food and rent and increasing interest rates will not fix that problem."

SAMA has maintained interest rates at low levels for more than a year as it looks to spur growth in the economy. An easing of demand following Ramadan, together with a moderation in the cost of global commodities, would help to ease food inflation, said Mr Sfakianakis. Wheat prices recently soared after a decision by Russia, the world's third-largest exporter, to ban exports until December after a poor harvest.

The supply of additional property units to address the chronic shortage of housing in the kingdom would help to control increases in rental inflation, he said. Inflation is proving more of a headache for the Gulf's biggest economy than in other countries in the region. Inflation in the UAE stands at 1 per cent, in Kuwait it is 3.4 per cent, Oman 3.5 per cent, Bahrain 2.1 per cent and Qatar has deflation at minus 2.9 per cent.