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Sat 23 Feb 2008 03:36 PM

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Saudi inflation breaks through 7% barrier

Inflation reached highest level in 25 years in January, spurred by rents and food costs.

Saudi inflation breaks through 7% barrier
RISING INFLATION: Inflation reached its highest level in 16 years in January. (Getty Images)

Saudi inflation hit 7% in January, its highest level in more than a quarter century, as rents and food costs spurred price rises in the world's largest oil exporter for a ninth straight month.

Saudi Arabia has been grappling with inflationary pressures as the economy, the largest in the Arab world, booms on a near five-fold rise in oil prices since 2002 and because it pegs its riyal to the weak US dollar, pushing up some import costs.

Rents in the kingdom jumped 16.7% year on year in January, data from the Central Department of Statistics showed on Saturday. Housing costs were the main driver of inflation, at its highest since at least 1981, said John Sfakianakis, chief economist at SABB bank, HSBC's Saudi affiliate.

"It is becoming obvious that the rental component is having a greater upward impact on inflation than any other item," he said. "Demand continues to outpace supply and in an environment where prices are rising, rents do not seem ready to subside."

Demand for office space alone surged 130% in 2007 over the year earlier, Sfakianakis said.

The cost of living index was 111.7 points on January 31 compared with 104.4 points a year earlier. Prices in January rose 1.36% from December, the fastest month-on-month increase in at least nine years. Annual inflation hit 6.5% in December.

The Saudi government has tried to offset the impact of rising prices on its 25 million people through measures including public sector cost of living allowances, welfare payments and subsidies.

But like most of its neighbours in the world's biggest oil-exporting region, Saudi Arabia's dollar peg forces it track American monetary policy at a time when the Federal Reserve is cutting interest rates to ward off recession.

Food and beverage costs, which are impacted by a rise in global commodity prices and a weaker currency, rose 7.9% in January, the data showed.

Saudi Arabia last year imported almost 25% of its goods from Europe and 8.4% from Japan, while another 13.4% came from the US, according to central bank data.

The US dollar, to which the riyal has been fixed for 22 years, fell to record lows against the euro and a basket of major currencies in November.

Saudi policymakers have repeatedly reiterated their commitment to the dollar peg, with central bank governor Hamad Al-Sayyari saying last week the country should avoid "easy solutions" to fighting inflation.

The impact of the exchange rate on local price rises is "limited", Al-Sayyari told a council that advises the king.

As inflation overtakes official borrowing costs in Saudi Arabia, the central bank has struggled to match five Fed rate cuts since September 18 which have taken the US benchmark rate down 225 basis points to 3%.

Saudi Arabia has reduced only its reverse repurchase rate, which guides bank deposit rates, in response to the cuts while leaving its benchmark repurchase rate, the lending rate, steady at 5.5%.

The central bank also raised reserve requirements twice in two months to force lenders to keep more money in their vaults in a bid to slow down credit growth, another trigger of inflation. (Reuters)

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