BMI Research lowers forecast on Saudi inflation to 2.8%

Saudi Arabia’s inflation is expected to average 2.8 percent in 2018, BMI Research said on Monday, lowering its forecast from the previous estimate of 3.3 percent.

Inflation averaged 2.7 percent year-on-year over January-May this year, up from deflation of 0.9 percent in 2017.

“Fuel subsidy cuts implemented in January have pushed transportation costs higher, with the component contributing an average 1.1 percentage points to headline inflation over the first five months of 2018,” the research and analysis firm said in a report.

“The impact will continue to be felt throughout the second half of the year,” it added.

Other factors that will impact the Kingdom’s inflation growth include: the introduction of a 5 percent value-added tax (VAT) at the beginning of the year and fuel subsidy cuts.

The impact of VAT was particularly notable in the food and drink component of the CPI basket, which contributed to an average 1.3 percentage points to inflation over January-May, BMI Research said.

It, however, added that retailers have absorbed some of the higher costs resulting from introduction of VAT.

BMI does not expect any significant slowdown in inflation in 2019, as more businesses are likely to pass on the costs of VAT to consumers, rather than absorbing them.

However, Saudi Arabia’s housing market, which has been adversely affected by the slump in oil prices since 2014, will prevent inflation from further accelerating in the coming months.

“Meanwhile, our forecast for further dollar strength in the coming months will also mitigate pressure on prices, given that the Saudi riyal is pegged to the US dollar,” BMI said.