Although the prices of essential commodities in the UAE have gone down due to a drop in oil prices worldwide, there has been a definite spike in the Consumer Price Index (CPI) due to the escalation in housing and utilities, Dubai-based economist Cedwyn Fernandes points out.

Professor Fernandes, an economist and Acting Director at Middlesex University Dubai, said that while there was only a modest increase in the overall inflation rate of 2.21 per cent from December 2014 to February 2015 in Dubai, the rise in the Consumer Price Index (CPI) was still quite high.

"This is because housing and utilities have increased by 5.46 per cent in just three months and a total increase of 7.17 per cent since February 2014. This has had a significant impact on the consumer, as housing and utilities have a weight of 43.70 in the CPI,” he said.

Listing several causes for the rise in inflation in the UAE, he attempted to analyse how a rise in housing and utilities impacts the overall CPI. The UAE imports most of its consumer goods including food, and the world prices of these goods have a direct impact on inflation.

"The Food and Agriculture Organisation (FAO) Index and oil prices are a good indicator of the direction of world prices. The overall inflation rate over the past three months has been a modest 2.21 per cent in the UAE as food prices have declined by 1.47 per cent,” he said.

This was mainly due to the decline in world food prices as indicated by the FAO Index, falling 3.4 per cent in the past three months and a whopping decline of 14 per cent since February 2014, he added.

"Oil prices have fallen by more than 50 per cent since summer of 2014. The decline in commodity prices has had a positive impact on inflation.”

However, housing and utilities bills are not controlled by falling oil prices and a rise in these continues to impact the overall CPI.

Fernandes said that other factors that play a significant role in the causes of inflation are linked to domestic factors in the form of non-tradable goods.

"If the domestic price of any tradable good increases due to a short-term shortage, the good can be quickly imported as UAE is an open economy. If a good is selling significantly more domestically than its international price, imports will go up and domestic prices will be in line with international prices,” he said.

However, for non-tradable goods like housing, it is not possible and, until the domestic supply of housing units catches up with demand, prices as reflected by rentals will keep increasing.

Fernandes predicts that this time around, as compared to 2006 and 2007, the prognosis for inflation in the UAE is good.

He said that the strength of the US dollar and fall in world commodities and oil prices have had a dampening effect on inflation.
Source: Gulf News