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| 29 May, 2018

Saudi inflation falls to its lowest level this year, as the impact of new taxes wanes

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Volunteers attend an event for Om Abdullah, a passionate cooker who used to cook and make tea to sell in the street to make money for living is honored by Saudi young women volunteers who gathered money for her to boost her work and to afford her more progressive conditions in her work on December 10, 2015 in Jeddah, Saudi Arabia. 
Image used for illustrative purposes.

Volunteers attend an event for Om Abdullah, a passionate cooker who used to cook and make tea to sell in the street to make money for living is honored by Saudi young women volunteers who gathered money for her to boost her work and to afford her more progressive conditions in her work on December 10, 2015 in Jeddah, Saudi Arabia. Image used for illustrative purposes.

Getty Images/Jordan Pix

Saudi Arabia’s inflation edged down 0.2 percent month-on-month in April, recording the lowest rate this year so far, according to the latest official data.

Consumer price inflation increased 2.5 percent in April, compared to the same period last year, driven mainly by the rise in tobacco, transport, food and beverage prices following the kingdom's introduction of several new taxes.

April's year-on-year inflation was the lowest so far this year, having reached 2.8 percent in March, 2.9 percent in February, and 3 percent in January.

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“Inflation started to edge down as the impact of VAT introduction started to retreat, although overall consumer price inflation remained positive due to food inflation,” Faisal Al Olayan, a Riyadh-based independent economic consultant, told Zawya by email in Arabic.

The kingdom introduced a 5 percent value-added-tax (VAT) in January this year. It also implemented a 100 percent selective tax on tobacco and energy drinks and a 50 percent tax on soft drinks from June last year, in a bid to encourage people to opt for healthier options and to boost government revenues. (Read more here).

According to Saudi Arabia’s General Authority for Statistics, tobacco prices rose 54.1 percent in the year leading up to April, while the transport and food & beverages categories rose 10.1 percent and 5.6 percent respectively when compared to the same month last year.

Prices of the housing, utilities, gas and other fuels category, which constitute a large weighting in the consumer price index, also increased 0.5 percent on an annual basis.

“Saudi will be on an upward path of raising energy prices until 2020 and the country currently only absorbed the first stage of price hikes, which raised inflation by one to 2 percent,” Salem Al-Zammam, the founder of economic consultancy firm Saudi Scope, told Zawya by email in Arabic.

At the beginning of January this year, the General Authority for Statistics adjusted the basket of goods and services and gave housing and utilities a much larger weighting. It also changed the base year for the consumer price index from 2007 to 2013.

However, clothing and footwear prices decreased 8.3 percent year-on-year in April, while the cost of recreation and cultural activities dropped 0.5 percent.

“Retailers in the clothing sector increased their sales offers and cut down their profit margin due to fear of stagnation in sales after the introduction of taxes. Several retailers also were bearing the value of the tax in an effort to attract more customers,” Al Olayan said.

Al-Zammam echoed his opinion, adding that VAT has not been transferred by most major retailers in Saudi Arabia to the consumer.

“Inflation will be volatile in my opinion until 2020 in the range of 2 to 5 percent and then back to decline,” he said.

The International Monetary Fund forecast in its latest report that inflation in Saudi Arabia will reach 3.7 percent in 2018, up from a deflation of 0.9 percent in 2017, and to fall to 2 percent in 2019.

Further Reading:
Saudi inflation edges down in March
Deflating Saudi Arabia sees decrease in price of consumer goods for the sixth month in a row
Saudi private sector growth picks up slightly after tax shock - PMI
Saudi retailers set for Ramadan boost
Saudi January inflation jumps to 3% on VAT, gasoline price hike

(Writing by Nada Al Rifai; Editing by Shane McGinley)
(nada.rifai@thomsonreuters.com)

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