Thursday , September 28 2023

Kuwait braces for inflation pressure – Rate seen at 5.5%

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KUWAIT CITY, June 4: The Economist Intelligence Unit of the “Economist” magazine, under the title “High inflation in Kuwait in 2022”, touched on the latest data issued by the Central Administration of Statistics on the Consumer Price Index, which shows that prices rose by an average of 4.4 percent during the first four months of 2022, reports Al-Rai daily. The EIU indicated that this figure is consistent with its expectations that inflationary pressures in Kuwait will increase during 2022, with the annual average inflation reaching 5.5 percent.

The magazine explained that this is due to supply chain bottlenecks exacerbated by the decisions taken by China to confront the Corona pandemic, and the global rise in material prices due to the Russian invasion of Ukraine, while at the same time it is expected to curb the growth of consumer prices, through the tightening monetary policy.

The unit added that Kuwait, like its counterparts in the region, has witnessed an increasing growth in consumer prices since 2021, and this matter was exacerbated by the global rise in materials prices in the wake of the war in Ukraine. The rise in oil prices contributed to the transportation segment, which is the fifth largest component of the consumer price index basket, recording an annual increase in prices of 4.8 percent. The unit indicated that although food price inflation, which is the second largest component of the consumer price index basket, fell to 9.1 percent from its record level of 11.5 percent in 2021, it was the second biggest contributor to inflation.

The unit believes that Kuwait remains vulnerable to fluctuations in international prices of foodstuffs, because it imports about 95 percent of its needs, indicating that the recent sharp rise in these prices prompted the government to establish a committee on food security. At the same time, the 2.3 percent rise on an annual basis in housing prices, which is the largest component of the consumer price index, contributes to raising inflation rates, due to increases in rent prices during 2021 caused by the imbalance in the local real estate market, while limited supply and speculation led to raise housing prices.

The unit expected that the growth in housing demand will continue to exceed supply despite the recovery of construction work, because the recovery in oil prices allows an increase in capital investment. The unit indicates the possibility that the departure of expatriate workers will reduce the demand for real estate and prices. The unit stated that the Central Bank of Kuwait raised interest rates in mid-March by 25 percentage points to 1.75 percent in line with the US Federal Reserve, which will affect the housing segment downward.

The sources stated that at the same time, higher interest rates will enhance the strength of the dollar and reduce the costs of imports because the dinar is linked to a basket of currencies dominated by the dollar. The Economist Intelligence expected that consumer prices in Kuwait will remain high in 2022-2023, and that the expected implementation of value-added tax in the second half of the forecast period, in addition to further reforms in the government price support system, will all lead to increased inflationary pressures in 2024-2025. It noted that the increased interest rates starting from 2022 will help compensate for the increase in prices, suggesting that the inflation rate will continue to be contained between 2023 and 2026 at an average of 2.2 percent.

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