UAE fuel price deregulation to have ‘one-off’ impact on inflation – Stan Chart

The United Arab Emirates’ move to deregulate fuel prices and rationalise subsidies will have a limited, one-off impact on inflation, a report by Standard Chartered has found.

The UAE announced this month that it would deregulate gasoline and diesel prices and introduce a new pricing policy linked to global levels.

Earlier this week, it was revealed that in August, the price of one litre of octane 95 gasoline will increase 24 per cent to Dhs 2.14, while diesel will fall 29 per cent to Dhs 2.05.

“The rationalisation of energy subsidies will likely have a one-off impact on inflation rates, reflecting the first price increase, which will close the gap between the subsidised prices and the new deregulated prices,” the report said.

“We expect higher fuel prices to feed through to the 2016 average inflation rate rather than that of 2015 since the new prices will only be implemented as of August 1.”

The bank has maintained its 2015 average inflation forecast at 4.3 per cent but raised its forecast for 2016 to 4.3 per cent from 4 per cent.

Latest data shows that UAE inflation rose to 4.2 per cent year-on-year in June on the back of a 10.2 per cent year-on-year increase in housing costs and a 4 per cent rise in education costs.

Housing, water, electricity, gas and other fuels have the highest weighting in the UAE CPI basket at 40 per cent. However Standard Chartered estimates that housing alone accounts for 30 per cent.

“Moderation in the housing market should partly offset the one-off impact of higher fuel prices on 2015 and 2016 average inflation rates,” the report said.

The report also noted that in the medium to long term, if global oil prices rise, the new deregulated prices will accordingly increase, which could cause further inflationary pressures.

Inflation in the UAE also tends to increase as oil prices rise, since it tends to lead to higher government spending and high consumer and investor confidence.

“Higher oil prices in 2016-17 will be more inflationary than in the past, but this is manageable and a cost worth paying, in our view,” the report added.

The UAE’s ministry of economy has also stressed that the deregulation of fuel prices will not adversely affect the prices of consumer goods in the country.

The ministry said it will work with relevant authorities across the emirates to tighten control over the market and prevent any attempt to raise the rates of goods.