Abu Dhabi inflation jumps with VAT introduction, but restrained by housing

Abu Dhabi residential rents sank 2.7 percent from a year earlier. (Courtesy Aldar)

DUBAI: Abu Dhabi consumer price inflation more than doubled in January as the UAE introduced a 5 percent value-added tax, with a weak real estate market preventing inflation from increasing even further, official data showed on Wednesday.
Annual inflation in Abu Dhabi, the biggest emirate in the UAE, jumped to 4.7 percent — the highest level since 2015 — from 2.0 percent in December, Abu Dhabi’s Department of Economic Development said.
The UAE’s imposition of VAT at the start of this year, designed to strengthen state finances in the face of low oil prices, was one of the biggest policy shifts in years; traditionally, Gulf governments have kept taxes to a minimum in order to attract investment and win favor among their citizens.
In a statement, the department described January’s higher inflation as “completely reasonable” given the new tax.
However, Abu Dhabi inflation could have increased much further without a weak real estate market. Residential rents sank 2.7 percent from a year earlier; rents and utilities have a 31.2 percent weight in the consumer basket, so a decline in those sectors offsets price rises for other goods and services.
Food and drink prices in January jumped 7.1 percent from a year earlier and transport prices increased 13.2 percent after recent hikes in gasoline prices.
Annual inflation in Dubai, the other large emirate in the UAE, rose more moderately in January, climbing to 2.7 percent from 1.5 percent in December, data released last month showed.
But falling house rents had an even bigger effect in restraining Dubai’s inflation, because housing and utilities account for 43.6 percent of the consumer basket there.
The UAE has not yet released nationwide inflation data and is expected to do so in the coming days or weeks. The International Monetary Fund has predicted average annual inflation in the UAE will climb to 2.9 percent this year from 2.1 percent in 2017.