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Inflation falls to 2.6 pct in Nov on weaker food price pressures Housing services component remains relatively high at 4.7% y/y

KUWAIT CITY, Jan 11: Inflation in the consumer price index (CPI) edged down to 2.6% y/y in November, from 2.7% in October. This small move masked some notable changes within the sub-components: another sharp fall in food price inflation was almost offset by a rise in ‘core’ price pressures. Going forward, we expect core pressures to continue to edge higher. But the overall inflation rate is still forecast to average a modest 3.0% through 2014, up from 2.6% in 2013. Food price inflation fell to 2.4% y/y from 3.5% in October, its sixth consecutive monthly decline. Given the component’s large weight in the CPI (18%), this move subtracted some 0.2% points from the overall inflation rate in November. Food price inflation has fallen from a peak of 6.3% y/y in May, more than accounting for the deceleration in inflation overall over the period. Though driven by softer international food prices, the decline in CPI food price inflation has been sharper than the historical relationship would suggest.

On the other side, ‘core’ inflation (i.e. excluding food) rose to 2.7% y/y from 2.5% in October, but the underlying picture was also mixed. The figure was heavily affected by a sharp rise in inflation in the clothing and footwear segment, which jumped to 1.4% y/y from -0.8% in October. Excluding this, ‘core’ inflation would have been unchanged. The increase was driven by a combination of a strong year-on-year base effect, and a sizeable 0.7% m/m rise in November 2013. Still, clothing inflation was very weak through 2013, and remains well below its average of 5% y/y or so of previous years.

The inflationary impact on the ‘core’ segment, however, was partially mitigated by an intensification of deflation in the ‘other goods & services’ component, to -1.7% y/y from -0.5% in October. The turnaround in inflation in this category has been precipitous: it stood at +6.3% y/y in November 2012. The decline - and ultimate reversal - of price pressures in the segment has been driven largely by a base effect generated by the price of jewelry. Jewelry prices (mostly gold) surged in mid-2012, but those increases have since fallen out of the annual comparison. Prices have indeed edged lower.

Elsewhere, inflation in the housing services component (largely rents) remained relatively high, at 4.7% y/y.  Indeed, they have picked up considerably over the past year, rising from a low of 1.0% y/y in November 2012. Price changes in this segment are only surveyed once every three months, and the next change is due in the December data. December 2012 saw a sharp 3.2% m/m jump, so a more modest increase this time around would see the y/y rate fall quite sharply. Given the housing component’s large weighting in the CPI, this could provide the context for a meaningful near-term decline in the overall headline inflation rate.  Any such effect, however, is likely to prove temporary. We see inflation edging higher through 2014 and perhaps crossing the 3.0% y/y mark around mid-year, as some of the factors - such as soft food prices and other base effects - that have been keeping inflation low start to unwind. Nevertheless, with economic growth still moderate and regional price pressures muted, inflation is unlikely to rise too far over the medium-term.

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