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Saudi Arabia Economics - Inflation jumps to record high on a monthly basis in Jan; impact dented by changes in weights in consumer basket

Record monthly inflation on fiscal measures

Saudi Arabia inflation jumped to a record high on a monthly basis in January, as the economy reacted to fiscal measures, led by the value-added tax (VAT). Inflation jumped 3.9% M-o-M, with 10 of the CPI’s 12 components registering average price increases of 5.4% M-o-M; transport was the highest at 12.8%, following the 80-120% increase in gasoline prices, followed by tobacco (10.1%) and food at 5.6%. Electricity prices jumped 28% M-o-M, still a low increase in relative terms, given that the tariff more than tripled for the lowest bracket, which represents c60% of total household subscribers. Clothing and education were the only two components that saw price declines in January, with clothing likely reflecting discounts offered by retailers to prop up sales amidst a weak consumer demand environment. On an annual basis, inflation accelerated to a five-year high of 3.0% in January from -1.1%; food inflation jumped to 6.8% Y-o-Y and non-food was up 2.4% Y-o-Y in January.
Change in basket weights partially dents inflation

The inflation outturn was lower than our expected 4.5%, largely due to the General Statistics Authority (GAS) introducing a new base year (2013 instead of 2007) and changing the weights of the constituents of the consumer basket (see Fig 4). Key changes saw the weight of food and beverages dropping by 2.9ppt, while that of housing and utilities increased 4.8ppt. These changes worked in  favour of a lower inflation number, given, primarily, depressed inflation in the housing and utilities component (rents are not affected by VAT, and housing prices have been softening for the past couple of years, given the weakness in the overall economy). We estimate headline inflation would have accelerated to 4.8% Y-o-Y in January if using the old weights, instead of the 3.0% when using the new weights.
Inflationary pressures to continue in 1H18

We expect additional filtering-through of the fiscal measures to the economy over the coming few months. Thus, we expect annual headline inflation to accelerate further throughout 2018. Anecdotal evidence suggests some businesses have been deferring passing on their increased cost pressures to end users amidst the weak consumer demand environment. Moreover, last year’s depressed base, when the economy went through a deflationary period (-0.8% average inflation in 2017), means unfavourable base effects will push inflation high over the course of the year. We stick to our average inflation forecast of 6.0% in 2018, awaiting inflation numbers over the next few months; however, the changed weights may lead us to revise our forecasts.

Mohamed Abu Basha