KUWAIT CITY, Feb 16: The Consumer Price Index (CPI) recorded a 2.6% year-on-year (y/y) increase in December, slightly up from 2.3% in November. The uptick in December came on the back of price increases in the housing and household goods and services segments, but was partly offset by a m/m decrease in food prices. Inflation also averaged 2.9% y/y in 2012, down from 4.8% in 2011. Core inflation, which excludes food and beverage prices, went up by 2.7% y/y. (Chart 1.) This was the first time in recent history where inflation in the core measure outpaced inflation in the general index.

This highlights the changing makeup of the sources of inflationary pressure, as inflation in food prices had decelerated in 2012, while other components saw more potent increases.  Food prices were up 2.1% y/y in December, their smallest such increase since late 2009. (Chart 2.) Prices were also down 0.7% m/m, largely thanks to price decreases in some major sub-components such as meat, poultry, and fish as well as cereals and bread. Inflation in food prices averaged 5.6% in 2012, with smaller increments in the second half of the year. The 2012 average was also noticeably lower than the 2011 average of 9.7%.

Trend
Prices for clothing and footwear increased by 3.9% y/y in December, similar to their 4.0% y/y average for 2012. Also similar to the general trend in 2012, the December increase was largely pushed by prices of readymade garments (i.e. store-bought clothing), which went up by 5.6% in December. Clothing and footwear prices have occasionally been a source of upward pressure on general inflation during 2012, but these prices are often determined by international factors (clothing and footwear being primarily imports), rather than local ones.
The housing services component, which makes up almost 27% of the general index and is made up almost wholly of rent, saw a 2.4% y/y increase, the first and only rise in that rate in 2012. (Chart 2.) Rental inflation could prove to be a source of upward pressure in the future, having dipped as low as 0.7% y/y in September last year.

Price inflation in household goods and services recorded a 2.9% y/y increase, alongside a 1.3% m/m uptick. (Chart 3.) Domestic services, a sub-component that had remained unchanged throughout 2011 and 2012, went up in December by 7.8% y/y.  Overall, inflation in 2012 was more subdued than initially anticipated at the start of the year, largely thanks to the sharp deceleration in food price inflation. A modest pick-up in rents and food inflation - combined with a robust consumer sector in general - could see inflation move higher in 2013. Nonetheless, given the low starting point, we expect inflation to remain modest in 2013, averaging 3.5% for the year as a whole.