Special Report: Catching up with inflation remains tricky

As a key oil producer and exporter, high oil prices spell good news for the UAE – but that does not mean there is no commensurate increase in the prices of consumer items or essential commodities.

Worldwide, many countries have been grappling with inflationary pressures in the last two to three years. In the last few months, the UAE too has been experiencing a general upward price trend of goods and services. This has been due to several reasons, high crude oil prices being one factor.

Not only have prices increased in supermarkets and gas stations, prices of cement, steel, other building materials and even luxury goods have climbed.

Of course, high crude oil prices have led to a general rise in the prices of other commodities, but inflation in the UAE is also due to factors such as the currency situation, borrowed inflation and the regional situation.

Last year for the first time in several years, inflation in the UAE surpassed three per cent with prices of most consumer items climbing by one and three per cent while rents surged by nearly six per cent and building materials maintaining their upward trend.

"Inflation to a large extent was caused by the price rise of products imported from countries whose currencies had appreciated against the dollar," Sultan bin Nasser Al Suwaidi, Central Bank Governor, said last week.

"The UAE's inflation rate is likely to fall from last year's three per cent as the euro has settled at its current levels after the earlier sharp fluctuations against the dollar," he added.

Echoing similar sentiments, Terence D. Allen, an Abu Dhabi-based independent financial consultant said high prices at the retail level is due to a combination of high oil prices and the weak dollar. "The dollar weakness and strong Euro as well as the high crude oil price is naturally causing inflation at the retail level. The price of oil has a lot to do with the general rise in prices of other items," he said, predicting that prices are unlikely to come down in the short term.

"The truth of the matter is, even if the dollar recovers at a later stage and oil prices drop, it would be unusual for prices of other commodities to fall. Generally, once prices of essential goods go up, they remain there."

Retailers agreed prices of essential day-to-day consumables such as foodstuffs including dairy products and other groceries have risen albeit marginally. However, this marginal rise is hardly felt by consumers in economies with high per capita incomes such as the UAE.

According to Georges Mojica, General Manager, Abu Dhabi Cooperative Society, there are signs of inflation but this is due to the currency situation, due to increased costs of raw materials and generally in line with international inflation.

"I don't think the rise in prices of essential commodities is due to the rise in petrol prices. The euro fluctuation has a lot to do with inflationary tendencies," he said. Consumers disagree that they are not hurt by rising prices. "Salaried people are sensitive to price rises and it pinches them when prices of consumer items go up. The very rich may not be affected but the middle classes and the poorer classes monitor prices," said an Indian banker.

"Expatriates being big savers are immediately impacted by any price rise," he added.

While most supermarkets and retailers have no choice but to increase prices on a par with the general price levels, cooperatives in the UAE are finding it hard to cope with such prices. "As we are cooperatives, we cannot accept the idea of high prices. All the cooperatives are putting pressure on suppliers and to an extent we are successful," said Mojica.

"Now suppliers are also concerned about prices and in the cooperatives we try to minimise the price increases," he added.

So will prices of consumer items come down? A look at the general consumer price index in the UAE shows that prices have climbed steadily over the past three years and if this is any indication to go by, consumers have to contend with rising prices. In fact, the Ministry of Finance and Industry will soon hold a meeting with dairy companies to finalise the increase in prices of milk and juice products.

"There is only way for prices – upward. They rarely come down and the only way to keep up with rising prices is to increase salaries proportionately," said a banker.

"With inflation running higher than the interest rates, expatriate investors are gaining nothing.

"On the contrary, the real value of their money has eroded over the past few years in the absence of any major salary increases," noted Mohammed Al Asoumi, a Dubai-based Gulf econ-omist.