Inflation in consumer prices remained unchanged at 3.1 percent year-on-year (y/y) in July as price growth across most components remained largely steady. Food inflation maintained its softness, especially after global food prices slipped back into deflation. Core inflation, which excludes food prices, was also unchanged but somewhat higher at 3.5 percent y/y. With inflation across most components expected to remain in check, we foresee inflation to average around 3.0 percent in 2016, slightly lower than the 3.3 percent recorded in 2015.
Food price inflation remained soft as global food prices slipped back into deflationary territory. Local food inflation steadied at 1.2 percent y/y in July. According to the Commodity Research Bureau, international food prices declined by 4.2 percent y/y in July, their biggest decline in four months. Global food prices were led lower by higher supplies of grains and vegetable oils. The weakness in local food inflation is being reflected in the weak non-durable goods inflation data. Inflation in this segment decelerated sharply this year, but appears to have leveled off recently, in tandem with local food inflation.
Furnishings & household maintenance inflation was a tick lower in July and inflation in clothing & footwear remained weak. After stabilizing for about four months straight, inflation in the furnishings & household segment came in slightly lower in July at 2.6 percent y/y. Inflation in clothing & footwear costs saw some gains in July, but remained weak at 0.5 percent y/y. The stronger dinar and more frequent and longer seasonal “sales” continue to cap costs in this segment.
Inflation in the ‘other goods & services’ jumped in July. After months of subdued rates, inflation in this component, which is mostly comprised of imported goods such as personal care products and jewelry, accelerated from 0.5 percent y/y in June to 1.2 percent y/y in July. The jump in inflation could be explained by higher jewelry prices, following a rally in gold prices in July.
Inflation in restaurants & hotels remained unchanged from June’s seven-month high of 4.1 percent mainly due to seasonality. Demand in this component, particularly in the ‘restaurants & cafes’ subcomponent, typically jumps during the summer season, especially during the Eid breaks.
Prices in the transportation sector fell for the seventh consecutive month in July.
Transportation costs fell by 1.9 percent y/y, unchanged from June’s pace. Inflation in this sector has been trending lower since at least 2009 mainly due to softer growth in both car prices and airfares and is currently the only component in deflationary territory. Both car prices and airfares continue to see downward pressures due to weaker sales, greater competition and more frequent and longer promotions. Case in point, airfares fell by a record -7.4 percent y/y in July and vehicle prices rose by a mere 0.6 percent y/y during the same period.
Inflation in services, excluding housing, remained steady in July. Inflation in services, which is predominantly driven by housing rent inflation, plateaued at 5.1 percent y/y in July. Excluding the cost of housing, inflation in services steadied at a relatively weak 1.6 percent y/y during the same period.