Rising fuel costs are hitting consumers in the pocket as inflation gathers pace.
UAE consumer inflation accelerated to 2.3 per cent in January, up from 1.24 per cent in December, according to the Federal Competitiveness and Statistics Authority.
Medical care, education and transport expenses drove prices higher as economists expect further price pressures to emerge in the first quarter of this year.
While the cost of health care rose by 5.66 per cent year-on-year in January, educational expenses increased by 4.99 per cent and transport costs by 4.36 per cent.
"Higher inflation does not bode well for consumer sentiment, particularly against the backdrop of job cuts and slow economic activity," said Dima Jardaneh, the Dubai-based head of economic research at Standard Chartered Bank.
Higher petrol costs have been one of the main inflation drivers following the deregulation of prices in the second half of 2015, say analysts.
"The rise in inflation will be particularly steep in the first quarter, with the higher energy prices on an annual basis," said Monica Malik, Abu Dhabi Commercial Bank’s chief economist. "We expect the trend to moderate from the second quarter."
Domestic petrol prices increased by about 6 per cent last month compared with December. The increase in utility and water charges in Abu Dhabi that came into effect last month also had an effect.
"Most central banks in the world target an inflation rate of around 2 per cent, which is a relatively healthy pace of price increases," said Tim Fox, the chief economist and head of research at Emirates NBD. "The current inflation rate is close to this and our expectation is that it will average 2.5 per cent this year, which is not something to be overly concerned about."
An increase in international oil prices could lead to a further rise in transport costs. Transport’s weight in the consumer price index (CPI) basket was raised to 14.6 per cent from 9.9 per cent previously. The statistics authority changed the base year for CPI calculations to 2014 from 2007 starting last October and changed the weights for the basket components, according to Reuters.
The introduction of value added tax (VAT) next year is also expected to be inflationary.
"Inflation is likely to be affected by the introduction of VAT, but the impact will depend on how much of the tax is passed on to consumers," Mr Fox said. "Our Emirates NBD Purchasing Managers’ Index (PMI) data shows that companies have been effectively absorbing rising input costs over the last year, suggesting that they will be equally sensitive to raising prices by the full amount of the tax."
Prices in the recreation and culture category dropped by 2.26 per cent in January compared with the same period last year. Last month, Abu Dhabi Commercial Bank forecast that inflation would touch 2.8 per cent this year, while Standard Chartered expected it to rise to 3 per cent.
In October, the IMF said that the UAE economy is expected to grow by 2.5 per cent this year, compared with 2.3 per cent last year.
Emirates NBD’s purchasing managers’ index (PMI) for the UAE rose to 55.3 in January from 55 in December, the highest since last July. A strong US dollar is expected to keep imports cheap and hence inflation in check.

Source: The National