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MENAFN - Arab Times - 07/12/2013

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(MENAFN - Arab Times) Inflation in the consumer price index (CPI) fell to 2.7% y/y in October, down from 2.9% in September. (Chart 1.) The performances of the individual components varied, though a further deceleration in food price inflation was among the key movements through the month. Despite robust consumer spending and some improvement in business sentiment, inflation is on track to average a modest 2.6% in 2013 - its lowest since 2004. A small acceleration is seen in 2014.

Food price inflation fell to 3.5% y/y from 4.5% in September, its fifth consecutive monthly decline. (Chart 2.) Given the component's large weighting in the CPI (18%), this move subtracted some 0.2% points from the overall inflation rate in October. Indeed, the decline in food price inflation over the past five months has more than accounted for the deceleration in inflation overall through the period. In aggregate, other components have gone the other way. Softer food price inflation has been driven by weakness in the fresh fish component.

In addition to food, the 'other goods & services' category contributed to the decline in inflation. Inflation in the segment fell from 0.4% y/y in September to -0.4% in October, its first negative rate since 2007. (Chart 3.) The move took 0.1% points off the overall inflation rate. This component - which includes cosmetics, jewelry and certain business charges, amongst other things - can be volatile. Its precipitous decline from a peak of 6.3% y/y in November 2012 has been driven by a base effect: a surge in the price of gold jewelry in mid-2012 which has now fallen out of the annual comparison.

Separately, deflation in the clothing & footwear segment intensified to -0.8% y/y, from -0.6% in September. But the change was not large enough to have a noticeable effect on the overall inflation rate. Along with the 'other goods & services' segment mentioned above, the dramatic decline in inflation in this segment over the past year has been key to reducing inflation overall. Taken together, these two components have reduced the headline inflation rate by 0.9% points over the past year, helping to keep 'core' (i.e. excluding food) inflation - now at 2.5% - low.

On the upside, there were significant increases in inflation in the 'furnishing & household maintenance' and 'recreation & culture' segments. Each added 0.1% points to the y/y inflation rate in October. Housing rent inflation was unchanged at 4.8% y/y in the month. But it is up significantly over the past year and is easily the largest source of upward pressure on the inflation rate overall. Other components were - for the most part - unchanged in October.

Going forward, inflation is expected to remain contained, though start to drift higher early next year. Over the next couple of months, inflation could actually fall as a result of a base effect-driven fall in housing rent inflation. But this effect will be temporary. Increases through next year should be tempered by a combination of modest international food price rises, soft import price pressures, and moderate economic growth. We look for inflation to average 3.0% in 2014, from 2.6% this year.

 






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