UAE inflation jumps with VAT but restrained by housing

United Arab Emirates consumer price inflation almost doubled in January after the introduction of a 5 per cent value-added tax, with a weak real estate market preventing inflation from increasing even further, official data showed on Wednesday.

The annual inflation rate jumped to 4.8 per cent — its highest level since 2015 — from 2.7 per cent in December, the national statistics agency said.

The UAE’s imposition of VAT at the start of this year, designed to strengthen state finances in the face of low oil prices, was one of the biggest policy shifts in years. Gulf governments have generally kept taxes to a minimum to attract investment and win favour among their citizens.

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UAE inflation could have risen much more without a weak real estate market. Housing and utility costs fell by 0.5 per cent from a year earlier. Those costs have a 34.1 per cent weighting in the consumer basket, so their decline offset price rises for other goods and services.

Food and soft drinks prices rose by 7.2 per cent while transport costs jumped 12.8 per cent after an increase in gasoline prices.

Monica Malik, chief economist at Abu Dhabi Commercial Bank, said the January data caused her to raise her average annual inflation forecast for 2018 to 4.4 per cent from her previous prediction of 3.4 per cent.

“We see some moderation in headline inflation from the January level as fuel price growth decelerates. We had expected the introduction of VAT to take a few months before fully filtering into consumer inflation, in line with international trends,” she said.

“However, the January inflation print suggests a relatively quick transfer of VAT into consumer prices.”

Malik said the benefit to state finances of introducing VAT would outweigh the short-term impact in the form of higher inflation and softer consumer demand. She forecast that the UAE would have a balanced fiscal position in 2018, with revenues supported by VAT and higher oil prices.

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