Prices set to fall sharply

Dubai: Shoppers should see lower prices for essential commodities in view of expectations that inflation in the UAE will fall this year. There is broad agreement among analysts and economists that inflation will ease in 2009 in response to falling demand.

US bank Citigroup is predicting inflation at 7.1 per cent this year, from 12.2 per cent in 2008. "Falling aggregate demand has vastly diminished current and expected inflation," Citigroup said.

"This has happened directly as demand lags in each country, but also indirectly as the global drop in demand pushes down commodity prices and feeds into broadly lower consumer prices."

Simon Williams, chief economist, HSBC Middle East, told Gulf News this figure could even be lower, estimating inflation to "range somewhere in the lower single digits".

A weak dollar and record high oil prices last year contributed to inflationary pressures in the UAE, with the retail and real estate sectors seeing significant price growth.

"UAE inflation was primarily a domestic driven dynamic last year," says Williams. "All factors are a lot weaker this year, and inflation is going to fall sharply."

A spiral of slowing economic growth and slowing credit growth will contribute to this year's inflation forecasts. According to Williams, lower inflation will be led more by falling global demand and the subsequent impact on food and other commodity prices.

With a correction in the real estate sector under way, combined with a strong dollar, inflation should significantly dip from 2008 levels.

But Williams says the importance of the latter should not be overstated. "The expectation that the dollar will continue to strengthen is questionable", he said.

Consumers are already seeing the impact of falling prices. "Prices are already coming down, or will come down& a price correction is on the cards," said Nandkumar, spokesperson for LuLu Group, one of the largest supermarket retailers in the region.

"Prices for goods such as rice and milkpowder have already fallen, and we are talking to our suppliers to reduce costs even more."

Rice, a staple component of household food budgeting, has experienced some of the sharpest price hikes, but according to Kumar, "rice prices are now already below the inflationary rate six months back".

These statements are backed by a December price index survey by Abu Dhabi's Department of Planning and Economy, which found that prices of 44 per cent of essential commodities, including flour, fish and seafood, declined in Abu Dhabi over the month. At the time, about 12 per cent of analysed commodities had retained their prices.

A check of basic food items at various Dubai supermarkets yesterday confirmed that the cost of some items has come down already.

For example, local tomatoes, which were retailing for between Dh6 to Dh8, at some supermarkets only a few weeks ago, can now be purchased for Dh2.50 per kilo.

In addition, a host of special offers on essentials such as cooking oil and flour were visible. "Prices for milkpowder, bread and oil have come down to 2007 levels," says Kamal Vachani, group director for Al Maya supermarkets, which have 22 branches in the UAE.

"All other products have remained at the same price, but we haven't seen a big shift in customers' buying behaviour so far."