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Is inflation picking up in the Kingdom?

Food prices, which may consume 20, 30 or even 40 percent of a family budget (depending on family size and income), have increased 3.3% percent in January 2007, according to the latest SAMA data. In comparison, it rose only 0.1% in the previous month (December 2006), 0.6% in January 2006 and 6.6% in the 12-month period ending Jan 2007.

The Cost of Living Index (CLI or COLI) numbers for food stood at 120.1 in Jan 2007 (point C), vs. 116.3 in Dec 2006 (pt B) and 109.8 in Jan 2006 (pt A). For each month, inflation, which is the percent change in the index from the previous month, is shown in the chart by the slope of the line segment joining the corresponding two points (the steeper the line, the higher is inflation). Thus, inflation for Jan 2007 is shown by the slope of the straight line segment BC, while the inflation for the 12-month period from Jan 2006 to Jan 2007 is shown by the slope of the straight line AC. The steepness of the line BC compared to the line AC shows that inflation picked up in Jan 2007 compared to the previous 12 month period [The latter is analogous to the average speed during, say, a 10-mile drive, while the former is analogous to the speed during the last mile].To compare the monthly to the 12-month numbers requires that we "annualize" the monthly number, i.e., multiply it by twelve. This gives us an annualized inflation rate of 39% in Jan 2007, vs. the 12-month rate of 6.6% ending on January 2007! The monthly "annualized" number is the rate that would prevail over a 12- month period if inflation continued at the same pace as in January. [In the chart, this is like stretching the line segment BC up 12 months. Note also that the 6.6% inflation rate calculated between Jan 2006 and Jan 2007, i.e., the slope of the line AC is the average of the twelve monthly segments between those two points].What caused such a large increase in food prices in January 2007?

We have shown in previous reports that food prices in the Kingdom tend to rise by larger-than-usual amounts around Ramadhan and Haj.

The chart below shows these seasonal patterns associated with: (1) Ramadhan (shown in 'red') and (2) Haj (shown in 'green') [Note that the seasonal patterns coincide only roughly with Haj/ Ramadhan dates].

The pattern suggests that the January increase could be a delayed effect of Haj this year, as it fell at the very end of December (the 30th). However, it could be for different reasons, considering that the January increase was so large relative to any other month in the chart.

In any case, there seems also to have been a "secular" rise in inflation since 2004 (the bars are getting bigger). In other words, the Ramadhan (as well as Haj) increases in food prices have been getting bigger in the past four years. Thus, the answer to our headline question is, 'Yes, inflation has been picking up in recent years'. We believe this is due to: (1)increased liquidity, and (2) drop in the purchasing power of the Riyal vs. the euro and other currencies over the period.

© Riyad Bank 2007