Saudi January inflation spikes on VAT, gasoline price hike

Saudi Arabia’s annual consumer price inflation jumped to 3.0 per cent in January after the government introduced a 5 per cent value-added tax and hiked domestic gasoline prices at the start of the year, official data showed on Sunday.

The figures suggested the new tax and more expensive fuel, part of a government drive to cut a big budget deficit caused by low oil prices, had a large impact on Saudi consumer spending power in some areas last month. Consumer prices rose 3.9 per cent from the previous month in January.

Read: Saudi Arabia raises fuel prices

Food and beverage prices jumped 6.7 per cent from a year earlier, restaurants and hotels gained 5.8 per cent, and transport costs soared 10.5 per cent.

However, clothing and footwear prices fell 7.9 per cent from a year earlier, partly because of deep discounting by retailers battling a slow economy, while housing and utility prices rose only 1.3 per cent. Residential rents are exempt from the tax, and the Saudi real estate market has been slumping.

The statistics agency changed the base year for the consumer price index to 2013 from 2007 last month and adjusted the basket of goods and services, making direct comparisons with previous months difficult.

But the new tax and higher gasoline prices clearly pushed up inflation sharply. Annual inflation was just 0.4 per cent in December, according to previously released data using the old basket.

Among changes to the consumer basket in January, housing and utilities were given a bigger weighting, of more than 25 per cent instead of 20.5 per cent. The weighting of food and beverage prices was cut to under 19 per cent from nearly 22 per cent, and transport got a slightly smaller weighting.

The government has taken steps to ease the impact of the tax and higher fuel prices on consumption, introducing a system of cash allowances for medium- and lower-income households, and announcing an additional SAR50bn ($13.3bn) package of handouts to citizens last month.

Read: Saudi hardship payments will boost economy, but could impact deficit

But Saudi inflation is expected to rise further in coming months as consumer demand begins to recover from the initial shock of the tax, and as more retailers and companies raise their prices instead of absorbing additional costs.

The International Monetary Fund has forecast Saudi inflation will average 5.0 per cent this year, after consumer prices fell 0.2 per cent last year.

The United Arab Emirates introduced 5 per cent VAT at the same time as Saudi Arabia, and data released last Thursday showed annual inflation in the emirate of Dubai rising to 2.7 per cent in January from 1.5 per cent in December.

Read: VAT sees UAE firm’s costs rise at sharpest pace since 2011

The tax appears to be pushing prices up less sharply in the UAE than in Saudi Arabia because Riyadh, running a much larger fiscal deficit than the UAE and therefore more eager to raise new state revenues, did not exempt nearly as many goods and services from the levy.

The other four rich oil-exporting states of the Gulf – Kuwait, Oman, Qatar and Bahrain – originally planned to impose VAT simultaneously with Saudi Arabia and the UAE but have not done so, partly out of concern about the effect on inflation and living standards. They may introduce the tax as soon as in 2019.

Read: Bahrain to have VAT preparations in place by year-end