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Consumer price growth steady at 2.9 pct

The inflation rate was stable at 2.9% y-o-y in June 2014 following off of the same rate in the previous month mainly due to steady changes in the CPI sub-components. Year-to-date, Kuwait’s inflation rate has increased by 2.9%. Inflation was generally stable across all sub-components in June, with the exception of tobacco and narcotics prices which witnessed a big jump. During the month, food price inflation decreased by 0.3% m-o-m bringing the y-o-y inflation to 2.5% compared with June 2013 levels. Food price inflation has continued it’s downwards trend since May 2013 when the inflation rate was at 6.3%.

Kuwait imports approximately 90.0% of its food items for domestic consumption thus the moderate food prices were in line with declining trends in international food prices — the FAO Food Price Index dropped by 1.8% m-o-m and nearly 2.8% y-o-y during the month pressured by drops in cereal and vegetable oil prices. 

Most significantly, prices of tobacco and narcotics increased by 5.8% m-o-m on the back of a 7.8% rise in the prices of all types of tobacco, bringing the annual inflation rate of the sub-component to 6.8% y-o-y. Further increases are expected in this category as Kuwait’s Ministry of Health is considering proposals to ask the government to increase tax on tobacco products and cancel subsidised sugar with a view to helping control non-communicable diseases according to the ministry’s Undersecretary Khaled Al-Sahlawi.
 
Furthermore, prices of furnishing equipment & household maintenance continued to increase for the fourth consecutive month to 4.7% y-o-y in June 2014. We noted that the price in this category has grown significantly as it used to hover around 2.2% — 2.8% in April 2013 to August 2013 and has remained above the 4.5% level since October last year. Similarly, housing services cost inflation was at 4.4% y-o-y in May 2014, increasing 0.6% from May 2014. 
Transportation costs also contributed to higher price inflation last month due to higher vehicle prices (up 1.1%), rising by 1.5% y-o-y in June 2014. Meanwhile, prices of clothing & footwear increased by 3.0% y-o-y. On the otherhand, notable deflation was witnessed in three major components of the CPI — healthcare, communication and other goods & services categories. 
 
Kuwait Inflation Outlook 2014
We predict consumer prices in Kuwait to cross the 3.0% y-o-y mark in 2H14 as accommodative monetary and loose fiscal policy should underpin domestic demand, driving price pressures. Wage rises may also apply upwards pressure on inflation in the second half of 2014 and beyond, especially if the Ministry of Health proceed’s with the proposal to increase the tax on tobacco products.  We project Kuwait’s inflation to grow by 3.5% in 2014 (2013: 2.7%).
 
Kuwait’s Ministry of Health is bearing in mind proposals to present to the government recommending an increase in the tax on tobacco products and cancel subsidized sugar from citizenry’s monthly ration with the aim of reducing the number of cases of non-communicable diseases (NCDs). Kuwait currently has one of the world’s lowest tobacco tax rates. An increase in the tax on tobacco products would increase the inflation rate but would not have a drastic effect because of its small weight as part of the basket (0.3%). On the other hand, eliminating the subsidy on sugar would drive the food and beverage component upwards, thus pushing the inflation rate higher as this sub-component has a weight of 18.4%.
 
Kuwait’s non-oil deficit has stood at KD 16.4 bln in the fiscal year 2013-14, compared to KD 17.3 bln’s oil revenues constituted 92.1% of the overall government returns for the 2013-2014 fiscal year, in contrast to 93.6% in the previous fiscal year. Kuwait’s parliament passed a record KD 23.2bln budget for the 2014/2015 fiscal year in early July, despite strong criticism from many MPs as well as the Finance Minister Anas Al Saleh over increases in spending, particularly on wages and subsidies. The increases in government spending in the next fiscal year, particularly on wages, along with a possible tax increase on tobacco reinforces our projection of inflation rising to 3.6% by year-end, up from 2.6% at end?2013.

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