Saudi inflation to continue at 6.1%; could result in weak economic recovery

Saudi Arabia’s consumer price index jumped by 6.1 percent year-on-year (y-o-y) in July, following the tripling of the VAT rate from 5 percent to 15 percent.

While the inflation rate is expected to hover around this level over the next 12 months, combined with the suspension of the Cost of Living Allowance, this will act as a major drag on households’ real incomes and is a key reason why the economic recovery from the coronavirus crisis will be weak, according to economic research company, Capital Economics.

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“Looking ahead, we expect inflation to hover around its current level over the rest of the next year as the effects of the VAT hike continue to dominate. The jump in inflation will act as a major drag on households’ real incomes, which will be reinforced by the government’s decision to suspend the Cost of Living Allowance, a cash transfer programme for public sector workers, as part of its austerity measures,” Jason Tuvey, Senior Emerging Markets Economist at Capital Economics said. 

Data released on Sunday showed that Saudi Arabia’s headline inflation rate jumped from a one-year low of 0.5 percent y-o-y in June to 6.1 percent y-o-y last month, its highest reading since 2011. On a month-on-month basis, consumer prices increased by 5.9 percent.

Saudi Arabia, the world’s biggest oil exporter, said in May that it would triple VAT to navigate out of the economic setbacks due to the twin shock of low oil prices and the coronavirus pandemic.

Meanwhile, food inflation – which accounts for around 20 percent of the CPI basket – rose from 6.4 percent y-o-y in June to 14.3 percent y-o-y in July, its highest rate since 2008.

Education, which is exempt from VAT, was the only price category not to record an increase in inflation last month.

“In contrast to previous bouts of austerity in the kingdom, households are shouldering a large share of the burden and this is a key reason why we think that the Saudi economy will recover only slowly from the effects of the coronavirus crisis,” Tuvey said.