Inflation in consumer prices saw a small increase in July, rising from 3.5 percent year-onyear (y/y) in June to 3.6 percent y/y. Inflation across all components, with the exception of food, either slowed or remained unchanged in July. Food inflation rose ahead of the Eid holiday, when the demand for food typically sees a stronger pick up. Food inflation is expected to subside in the near-term, amid an ongoing decline in international food prices.
Core inflation,which excludes food, remained steady at 3.5 percent for the third consecutive month in July as pressures from all components, excluding housing, have been retreating. Easing inflation across most components and a stronger dinar will ensure limited upward inflationary pressures going forward.
We expect annual consumer price inflation to average close to 3.5 percent in 2015. Inflation in the wholesale price index eased recently after upward pressures from its major components subsided(manufacturing and mining & quarrying, in particular). Against a backdrop of softer global oil prices, we expect inflation in the wholesale price index to remain in-check in the nearto medium-term and to help in easing inflationary pressures on consumer prices.
Inflation in food prices continued to inch higher in July, coming in at 4.1 percent y/y versus June’s 3.6 percent y/y. The rise in food prices was mainly due to a stronger rise in food demand ahead of the Eid holiday, which is typical of that period. A hike in the cost of fish and seafood over the summer may have also pushed overall food inflation higher: fish and seafood prices rose by 12.2 percent y/y and 14.5 percent y/y, respectively, in June and July. However, prices in this subcomponent are expected to come in lower. In August, a local boycott against exuberant price hikes forced prices down.
Also, international food prices are declining; according to the Commodity Research Bureau global commodity index, prices were down by around 16 percent y/y in July; as a result, we expect upward pressures on local food inflation to remain limited over the coming months. Housing rent inflation accelerated to a six-year high of 6.5 percent y/y, though it appears pressures are easing following strong gains in 2014.
Rents rose by an annualized 3.2 percent during 2Q15, their slowest pace in almost a year. Further easing is expected in this segment especially with real estate activity cooling off substantially thus far in 2015. Inflation in clothing & footwear, and furnishings & household maintenance remained subdued in July. Clothing & footwear inflation remained unchanged from June’s reading, declining by 1.5 percent y/y on the back of seasonal promotions and lower foot traffic due to the shorter opening hours during Ramadan.
Inflation in this segment has been trending downwards for nearly a year due to a high base and a stronger dinar (most goods in this segment are imported). Inflation in furnishings & household maintenanceappears to have steadied for now, after coming in unchanged from June’s figure of 4.2 percent y/y. Inflation in the ‘other goods & services’ component continued to slow in July. Inflation in this component, which includes prices of personal care products and jewelry and certain business charges, has been trending lower since it peaked in April of this year.
The slowdown can be explained by the stronger dinar, given that the bulk of the goods in this component are imported. Tobacco & cigarette price inflation witnessed a large slowdown in July, sliding from 6.0 percent y/y in June to 1.5 percent y/y. This was mainly due to a high base around the same time last year when Kuwait’s Ministry of Health was mulling over a potential tax hike on tobacco products.
This led to strong gains in demand for tobacco products (in anticipation of a potential tax hike) and ultimately tobacco prices. We expect inflation in this segment to gradually rise to its pre-2014 summer rates of around 6 percent y/y in the near-to-medium term.
Wholesale price inflation has remained rather steady since the start of 2015, on the back of stable manufacturing costs and a slowdown in mining & quarrying inflation. Inflation in the wholesale price index, which is typically more volatile than consumer price inflation, eased slightly in July, to 3.4 percent y/y.
Moderating inflation in the manufacturing, and mining & quarrying components helped offset the rise in agriculture, livestock & fishing inflation over the summer. The latter’s rise was mainly due to hikes in fish & seafood prices.
However, upward pressures from this component are expected to have subsided in August after the local boycott of the fish market forced prices to come down. Inflation in the wholesale price index is expected to remain steady in the coming months amid softer global oil prices and a stronger local currency. This, in turn, should help keep consumer price inflation in check and near our expectations of 3.5 percent.