Prices
for essential consumer goods and services decreased by 0.03 per cent in
June compared to the same month last year, data from the Ministry of
Economy showed on Monday.
A countrywide slump in housing rents and a decline in food prices were the main contributors to the fall.
From
January to June of this year, the consumer price index fell by 2.7 per
cent, due to a 5.8 per cent decline in housing costs and a 2 per cent
slippage in food prices. Housing rents and food prices account for more
than half of the consumer price index basket.
The
negative inflation — or deflation — in June should bring welcome relief
to consumers who bore the brunt of double-digit inflation in recent
years. Inflation in the UAE hit a 20-year high of 12.3 per cent in
2008, after reaching 11.1 per cent in 2007.
However,
Tarek Coury, an economist at the Dubai School of Government, warned
that a deflationary environment would probably lead to cuts in salaries
and wages.
“As
prices fall, firms experience a profit squeeze that they pass on to
their workers by lowering their money wages,” Coury said. “As far as
the (employed) consumer is concerned, this may be a wash.”
Giyas
Gokkent, the chief economist at National Abu Dhabi Bank, said that
deflation “is symptomatic of the significant economic slowdown” in the
country. Growth in the UAE economy has slowed to a crawl, and many
private sector economists predict that the economy will shrink this
year. Consumers have cut spending as firms have laid off employees and
construction projects have been cancelled or postponed.
Prolonged
deflation can inhibit economic recovery. Consumers may curtail their
spending out of fears of reduced wages or postpone purchases in
expectation of further price cuts, thus creating a vicious cycle of
negative growth.
However, both economists see little chance of chronic deflation in the UAE. “I
regard the current phenomenon of declining consumer price index as a
temporary issue, just as double-digit inflation in the past few years
was temporary,” Gokkent said. “It will start to rise, likely from 2010.”
The
June deflation compared with year-to-year price increases of 0.8 per
cent in May, 1.8 per cent in April, 4.5 per cent in March, 6.3 per cent
in February and 7.3 per cent in January.
Nevertheless,
prices for the first half of the year were 3.4 per cent higher than in
the same period of 2008, the ministry data showed.
“The data are interesting because they appear to show some stabilization in consumer price index,” Gokkent said. He added
that prices might
decline further before recovering in 2010.
