A glut of property supply in Dubai contributed to the steepest fall in consumer prices since records began four years ago, as a housing bubble that burst in 2009 continued to be felt in the wider economy, data showed on Thursday.
Consumer prices in the UAE member fell 1.7 percent on an annual basis in February, as an inflow of new residential units pushed rents down.
"There might be some areas in Dubai where prices are picking up, but there is still an excess in supply in the market," said Liz Martins, senior economist at HSBC in Dubai.
Dubai's aggressive building drive has resulted in oversupply, with thousands of new residential and commercial units still set to enter the Dubai real estate market, with prices plunging by up to two-thirds from their 2008 peak.
Bullish growth came to a halt in 2009 when Dubai, home to the world's tallest tower Burj Khalifa, announced a US$25bn debt restructuring of conglomerate Dubai World.
Weakness in the property sector and slow bank lending held inflation below 1 percent for most of last year and Dubai entered deflationary territory in January when consumer prices fell 0.7 percent compared to the previous year.
February's figures showed a month-on-month decrease in consumer prices of 0.6 percent after a 0.9 percent fall in January, data from the Dubai Statistics Center showed.
A Reuters poll in January showed that a nearly four-year decline in house prices in the UAE would not end this year and that prices would fall by a median 5 percent.
Dubai only started to release monthly inflation figures at the beginning of 2009. Economy Minister Sultan bin Saeed al-Mansouri said on Wednesday that inflation in the UAE federation is not expected to exceed 2 percent in 2012.
Analysts polled by Reuters in December forecast average inflation of 2.4 percent in 2012, up from 0.9percent in 2011.
Growth in business activity in Dubai's non-oil private sector slipped slightly in February as expansion in output and employment weakened, a recent purchasing managers' index showed.
"What we see in PMI for the UAE as a whole is that input prices are going up for companies but they are not being able to pass them on to consumers... That is testament to a slightly weaker demand climate here," Martins said.
The International Monetary Fund said on Wednesday it expected UAE inflation to remain subdued at around 1.5 percent this year.