Kuwait inflation still in double digits but likely headed lower later this year
In its latest economic brief, National Bank of Kuwait (NBK) reports that consumer price index (CPI) inflation posted further head-turning advances in recent months: 11.4% (yoy) in April (a record) and 11.1% in May 2008. NBK does see, however, indications that inflationary pressure is easing, albeit from a strong starting point. Price pressures in Kuwait may well be affected by the same factors at play on the international scene: slower growth, tighter money, and abating pressure on commodity prices (chart 1). [The Commodity Research Bureau, CRB, tracks commodity prices. The index shown here is the broad CRB spot index made up of food, energy and metals prices.]
Inflation started accelerating back in 2007 and really picked up in late 2007-early 2008. In Kuwait, food and housing prices were the often-mentioned culprits pushing the CPI higher. Food prices, of course, rose on the back of higher worldwide commodity prices. Housing costs shot up in the wake of a booming economy as well as demographic pressures. By May 2008 however, most sectors had caught the inflation bug with transport lagging behind (5.4% yoy in May) thanks to subsidized energy prices. Clothing was the other laggard, thanks to imports from primarily dollar-pegged countries (6.2% yoy, see table below).
A while back and in response to rising prices, the Central Bank of Kuwait (CBK) clamped down on credit and money growth. Debt indicators appeared to start easing back at the beginning of this year. Money supply numbers have also shown slower growth over the past 3 months (chart 2).
According to NBK, May data show food inflation still running high, 10.8% (yoy), though food prices did fall for the month, 0.6% (mom). Down the road, food prices ought to benefit, from lower commodity prices, provided those hold.
Housing services (mostly rent) is a bit trickier to interpret near-term because rents are surveyed and updated only once per quarter. Nevertheless, March was only a slight improvement over December, and the recent cooling-off of real estate suggests that inflation in this sector might ease from its May 14.9% (yoy) rate. That sector makes up 27% of the overall CPI.
Consumer price index & inflation in Kuwait
Another part of housing-related costs, called ‘housing goods and services’, is also running high at 15.3% (yoy) in May. This category makes up almost 15% of the CPI and appears driven, in part, by more expensive furniture and appliances (both imports).
Of course inflation was a hotly debated topic well before it reached double digits in February. Earlier this year, the government enacted pay increases and subsidies on some food items to help alleviate the problem. And while Parliament may ask for further food subsidies, the CBK is doing its part by being tighter on money and by beseeching politicians to do their part (i.e. no more pay increases). The CBK insists that fiscal policy has a role to play in fighting inflation.
As we enter the second half of the year, NBK expects inflation to slow some. The yoy rates may well top near the 11% readings of April and May. The strong price momentum of Q1 2008 appears to be breaking (chart 2): witness the ’flat’ readings in some categories in May (see table). In the months ahead, inflation should ease as a result of slower economic growth (both locally and worldwide), lower commodity prices (see chart 1), months of tighter money, and the appreciated KD (up almost 9% since de-pegging in May 2007).
Therefore, and though September may see an upward blip in CPI (Ramadan, Eid, and back-to-school), NBK expects to see year-on-year CPI rates in the 7-8% range by year-end and that would put 2008 inflation at 10.0% for the year, compared to 5.5% in 2007.
