Inflation in UAE

This article provides an overview of inflation in the United Arab Emirates (UAE), including its causes, effects, and trends. It discusses the measurement of inflation and the factors driving inflation in the UAE, such as fuel and food prices. The article also explores the impact of inflation on consumers and the economy, including its effects on purchasing power, currency valuation, interest rates, and cost of living. Additionally, it highlights the statistical data and forecasts related to inflation in the UAE. Stay informed about the latest developments in inflation in the UAE.

Inflation in UAE:
Introduction:
The United Arab Emirates (UAE), as a small economy with an open
capital account and pegged foreign exchange rate regime, has limited scope for
exerting an independent monetary policy. More specifically, given that its key
policy objective is to maintain a stable peg with US dollar, domestic short-term
interest rates generally follow US interest rates and therefore, the Central Bank
of the UAE (CBUAE) does not anchor the inflation target. Moreover, inflation
in the UAE moves for the most part in response to other forces that are not
under the direct control of the central bank. Specifically, non-tradables account
for 63% of the CPI basket, of which housing accounts for 39% of the total.
Further, inflation of tradables (37% of the CPI basket) moves with
developments in the nominal effective exchange rate (NEER), largely attributed
to bilateral movements in the US dollar with respect to major trading partners.
While there is no explicit inflation target in the UAE, inflation is an important
economic indicator which the CBUAE closely monitors.1 The following
discusses the various inflation measurements and assesses the challenges
involved in capturing underlying inflation.
Inflation measurements
Inflation measures how quickly prices of a basket of goods and services rise in
a given period of time. In other words, it measures the general price level,
where a positive figure implies an increase in the cost of living and a fall in the
purchasing power of money. In general, the prices of a basket of goods and
services that are representative of the economy are collected; then the cost of
this basket is collated to generate a consumer price index (CPI), which is also
called headline inflation. In the UAE, headline inflation measures the price level
of a basket of 334 different categories of goods and services, collected by the
Federal Competitiveness and Statistics Authority (FCSA). This CPI is
calculated by using a Young index, which assumes expenditure weights are
constant over time.

Effects of Inflation In UAE:
Dubai’s consumer inflation rose to 4.6 percent in April, when compared on a
year-on-year basis. This was the highest reading since May 2015, according to
a report from Emirates NBD.
For the month-on-month figure, consumer prices rose 1.2 percent, the biggest
monthly increase since January 2018, according to new data from the Dubai
Statistics Center.
Khatija Haque, Head of Research and Chief Economist at Emirates NBD, said:
“The main driver of inflation in Dubai in recent months has been transport
costs, which were up 28.8 percent year-on-year in April, accounting for around
half of headline inflation.
“Food prices (8.6 percent higher year-on-year) were the second biggest driver of
inflation in April, followed by recreation and culture costs and restaurant and
hotel prices.”
Inflation rate in the Arab countries is expected to rise to approximately 7.5
percent in 2022, compared to 5.7 percent in 2021, reflecting the impact of
international supply chain challenges and the rise in the prices of agricultural
and industrial commodities as well as energy products due to current global
developments.
The 16th edition of the Arab Economic Outlook Report released by the Arab
Monetary Fund (AMF) added that some inflationary pressures are expected to
emerge over the forecast horizon due to the anticipated increase in aggregate
demand levels; the rise in consumption tax rates in some Arab countries, the
depreciation of some Arab currencies against major currencies, and the impact
of other inflationary factors that vary from one Arab country to another.
Reference:-https://www.arabianbusiness.com/politics-economics/inflation-
on-the-rise-in-the-uae-everything-you-need-to-know

Inflationary Trend in UAE:
Factors causing inflation of fuel and food prices 'beyond the control of central
banks': experts. IMF chief warns of 'increased risk of recession' in 2023. UAE
residents spending less due to rising inflation and cost-of-living. Global food
inflation looms as drought conditions worsen.
The biggest increase in the UAE’s CPI in 2021 was in the transport
component of the index, which reached 18 per cent year-on-year by December
and averaged a 9 per cent increase over the whole of last year. It is likely that
the main drivers of this increase were petrol prices and vehicle costs, both of
which have increased sharply over the last year.
UAE petrol prices had increased almost 48 per cent year-on-year by the end
of last year, reflecting the higher price of crude oil in 2021. While petrol
prices are likely to increase further in the short term — the February price rise
was 11.5 per cent month-on-month — as oil prices remain elevated, we expect
crude prices, and therefore, petrol prices at the pump to soften in the second
half of the year.

New and used vehicle prices probably also contributed to the increase in
transport costs for consumers in the UAE last year.
Once again, this was something of a global phenomenon as semiconductor
chip shortages — a result of Covid-related lockdowns across Asia — meant
car producers could not increase production fast enough to meet demand.
Housing (including utilities), transport and food together account for almost
63 per cent of UAE’s consumer basket, with housing alone accounting for just
over one-third. Last year, housing and utility costs in the CPI declined by 3.5
per cent from 2020, which helped to offset some price increases in other
components of the index.
We expect food price inflation to continue to feed through to the UAE CPI
over the course of this year as the UAE imports most of its food. However,
food prices are typically very volatile and we do not anticipate a sustained
increase in domestic rates — not least because we expect the US dollar to
strengthen this year, mitigating some of the increase, and also because the
UAE authorities can step in to stabilise the market through price caps and
managing essential food supplies.
The other segments of the UAE CPI that recorded some increase in prices last
year were mainly services. Recreation and culture prices increased 4.5 per
cent on average last year as leisure activities normalised, after declining more
than 16 per cent in 2020.
Education costs rose 1.1 per cent, health care was up 0.4 per cent, and hotel
and restaurant prices rose just 0.7 per cent on average over 2020, even as most
restrictions were lifted and tourism recovered in the final quarter of 2021.
To some extent, this relatively modest inflation reflected excess capacity in
education, health care and hospitality sectors last year, and competition
between businesses which have kept prices from rising more quickly.
United Arab Emirates Inflation Rate
In United Arab Emirates, the main components of the Consumer Price Index
are: Housing (35.1% of the total weight); Transportation (12.7%) and Food &
SoftDrinks (12%). Education account for 7.6%; Communications for 5.9%;
Textiles, Clothing & Footwear for 5.2%; and Furniture & Household Goods for
5.1%). Others include: Miscellaneous Goods and Services (4.9%); Restaurants
& Hotels (4.6%); Recreation & Culture (3.1%); Medical Care (2.2%); and
Tobacco (0.2%). The national index has a base of 100 as of 2021.

UAE Inflation Rate Edges Down to 2.5% in December
Annual inflation in the United Arab Emirates inched down to 2.50 percent in
December of 2021 from 2.58 percent in the previous month, which was the
highest level in 36 months, due to a slowdown in prices of both transport (17.95
percent vs 18 percent) and restaurants & hotels (1.60 percent vs 2.01 percent).
Meanwhile, prices of food & beverages continued to rise (3.71 percent vs 3.65
percent). On the other hand, prices fell further for housing & utilities (-2.58
percent vs -2.99 percent); and miscellaneous goods & services (-1.02 percent vs
-0.72 percent). On a monthly basis, consumer prices edged up 0.02 percent,
easing from a 0.59 percent gain in November.
After effects of Inflation:
 Reduces Purchasing Power.
 Lowers Currency Valuation.
 Inflates Interest Rates.
 Increases Economic Inequality.
 Raises Cost of Living.
 Boosts Spending and Investment.
 Lowers Unemployment (But Not Always)
 Stimulates Short-Term Growth.

Statistical Data:
Conclusion:
In the UAE, things are a lot rosier, from an inflation perspective. With the rate
forecasted to hit 3.7% in 2022 and 2.8% in 2023 (according to the IMF), the
region enjoys one of the lowest levels of inflation worldwide.