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Inflation expected to reach 3 pct in 2014

Inflation in the consumer price index (CPI) rose from 2.7% year-on-year in April, to 2.9% y/y in May. The slight rise in inflation was mostly driven by core inflation (excluding food), which also climbed from 2.7% y/y in April to 2.9% y/y in May, making it currently on par with the overall inflation rate. The rise in core inflation primarily stemmed from y/y rises in clothing & footwear prices and furnishing & household maintenance costs. Core pressures are expected to remain firm (in the housing sector and its related components in particular) and food prices could start to climb. However, upward pressure on the overall inflation rate should be contained and we expect the overall inflation rate to average at 3.0% y/y in 2014.
Food price inflation remained largely unchanged, slowing marginally from 2.9% y/y in April to 2.8% y/y. Food price inflation appears to be bottoming out and we could see prices rising in the short-term, in-line with higher international food prices.

Inflation in the biggest component of the CPI — housing rents- was steady at 4.6% y/y, unchanged from April. This was widely expected, as the housing component is only updated once every three months. Inflation in housing rents is projected to pick up next month amid rising activity levels in the sector.
Pressures in the three other major components of the CPI — clothing, furnishings and ‘other goods & services’ resumed their upward trajectory in May. Clothing & footwear prices climbed from 2.9% y/y in April to 3.1% y/y in May, presumably on the back of higher demand in the run up to the summer season and Ramadan.

The furnishings & household maintenance component may be seeing the spillover effects from the recent rise in housing services costs. Inflation in the furnishings component rose from 4.9% y/y in April to 5.2% y/y in May. The ‘other’ component, which although remains in decline, is showing signs of a turnaround.
Headline inflation is expected to average at 3.0% in 2014, amid firm pressures from the housing sector. In the near term we may see upward pressures from the food component for some time, given the recent trend in international food prices. Housing inflation is set to remain firm for the medium term, which may continue to put some upward pressure on the furnishing component, given its rather strong link with housing inflation.


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