NBK’s latest Economic Update reports inflation in the Kuwait consumer price index (CPI) rose slightly to 2.7 per cent y/y in December, from 2.6 per cent in November.
Although small, the move came as a surprise: Kuwaiti inflation had been expected to fall sharply in December as a result of a base effect. While inflation should remain at moderate levels through 2014, December’s higher than expected figure is likely to justify an upward revision to NBK’s year average forecast of 3.0 per cent over coming months. On average, inflation in Kuwait stood at 2.7 per cent in 2013, the lowest in nine years.
The ‘surprise’ in the December figure was driven by the housing services component – mostly rents. It rose by a larger than expected 2.0 per cent m/m. The year-on-year rate still fell to 3.6 per cent from 4.7 per cent in November, but this decline was smaller than anticipated. Due to measurement issues, movements in this component can be choppy. But the latest figure suggests an annualised inflation rate of eight per cent or so – considerably faster than the general inflation rate.
Ironically – despite the upside surprise – housing was the only sub-component that made a notable negative contribution to the change in the headline y/y inflation rate between November and December. Most other index components saw meaningful increases. This was noticeably true in the ‘clothing & footwear’ and ‘furnishing & maintenance’ segments, inflation in both of which continued its sharp acceleration of recent months. The former reflects a rebound from a period of falling prices around a year earlier. The latter has seen especially strong m/m price increases for the past four months.
Meanwhile, food price inflation rose for the first time in seven months, to 2.8 per cent y/y from 2.4 per cent in November. This is still much lower than its recent peak of 6.3 per cent reached last May. The deceleration in food price inflation over the past few months has for the most part been driven by falling food prices at an international level. Although the latter are still falling, the fall in CPI food price inflation may have gone slightly too far in 2H 2013 and could reverse somewhat in coming months.
Overall, the above movements appear to suggest that ‘core’ price pressures in Kuwait may now be rising, albeit from a very low base. Although one measure of ‘core’ inflation – the CPI excluding food – actually edged down to 2.6 per cent from 2.7 per cent in November, this was heavily influenced by the erratic housing segment. If both food and housing are excluded, inflation has actually rebounded quite sharply in recent months.
NBK said the high finishing point for inflation in 2013, however, does suggest some upside risk to the bank’s 3.0 per cent year-average inflation forecast for 2014. A figure closer to 3.5 per cent may now be more likely.
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