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Consumers suffer as inflation hits 11.5%
Inflation in Abu Dhabi soared to 11.5 percent during the first quarter on the back of increased state spending and "unacceptable" rises in the price of basic goods, rents and raw materials, the Abu Dhabi Department of Planning and Economy (DPE) said on Saturday.
The DPE said in its weekly report carried by state news agency WAM that inflation in the UAE capital stood at 10.9 percent at the end of 2007. Inflation in 2006 was 8.3 percent, the DPE has said previously.
The DPE said there was "consensus" that the soaring rental costs were the main driver behind inflation in Abu Dhabi, and were also having a knock-on effect on all sectors - driving up the cost of other goods and services.
Rents in the UAE capital soared 17 percent in the first quarter, compared to the year-earlier period, according to a previous report by the DPE, and are expected to rise up to a further 45 percent by the end of 2009, Egyptian investment bank EFG-Hermes said on Saturday.
Rent and rent-related expenditures comprise 45 percent of total expenditures of a consumer in the emirate, with low- and middle-income people spending 50 percent of their salary on accommodation, according to the DPE.
The department also highlighted the cost of fuel - diesel went up by 52 percent in the past four months - and the dirham's link to the ailing US dollar as contributing to inflation.
The dirham's dollar peg was pushing up the cost of imports from places such as Europe, the DPE said.
The UAE fixes its currency's exchange rates to the dollar, which restricts the central bank's ability to fight inflation by forcing it to mirror US monetary policy in order to maintain the relative attractiveness of the dirham.
The US Federal Reserve has been slashing interest rates since September in an effort to ward off recession, at a time when the UAE should be raising rates to soak up excess liquidity in the market.
The DPE said continued high inflation risked undermining the attractiveness and competitiveness of Abu Dhabi and the UAE's business environment, especially in trade and tourism.
"The domestic monetary policy, which is one of the mechanisms to curtail inflation, is contingent on external determinants and factors, based on priorities that greatly differ from the requisites of the booming local economy," the report said.
"It is not reasonable that domestic interest rates increase or decrease due to external causes, one of which is the US Federal Reserve policy, whereas at the same time, UAE economic indicators require an opposite path."
The DPE also called for an overhaul of the way the UAE measures inflation, stating that its price index still depends on the results of the Family Income and Expenditure Survey of 1997. No general consumer price index is available, so far, for UAE and expatriate families, it said.
In addition to coming up with a more accurate way of measuring inflation, the DPE called on the government to reconsider real estate regulations and the way fuel is priced.
It also urged the government at both the local and federal level to work together to curb consumer loans and state spending, and to encourage a culture of saving and rationalisation in society.
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Posted by kaptain, Dubai, UAE on 16 June 2008 at 14:04 UAE time
DEPEG Dirham; it is serving no good for the people.