Our inflation is projected to remain low: Saudi Arabia has consistently experienced exceptionally low inflation rates since the pandemic, compared to other emerging economies. This pattern is anticipated to persist, with inflation rates projected to weaken even further in the coming years, according to a Capital Economics note seen by EnterpriseAM.

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Since the beginning of 2014, our headline inflation rate has averaged 1.1% y-o-y, except for two notable periods of increased inflation from late 2018 and early 2020. Many emerging markets saw inflation surge in 2022 when the fallout from the pandemic hit supply chains and the war in Ukraine ramped up global commodity prices. However, Saudi Arabia’s headline rate climbed to a peak of just 3.4%, softening even further in the next months, hovering around the 2% mark until now.

WHAT’S KEEPING INFLATION AT BAY?

#1- A strong USD: Saudi Arabia has benefited significantly from the strength of the greenback in recent years. Due to the SAR’s peg to the USD, the Kingdom’s “nominal trade-weighted exchange rate has appreciated by 14% [since the beginning of 2021], increasing its purchasing power,” according to the research note.

Caution ahead: The recent weakness of the USD could be a factor behind the slight acceleration in the Kingdom’s headline inflation in the last few months, Capital Economics’ James Swanston warned, adding it could result in further upward pressure on prices in the coming months. The good news is that the greenback is expected to regain most of its lost value over the next year, the note says.

#2- Cheaper Chinese imports: Disinflationary pressures from China, which supplies over a fifth of the Kingdom’s imports, have helped ease import price pressures. After adjusting for exchange rate fluctuations, producer prices in China have remained in negative territory for the most part since 2021. This has directly translated into lower core goods prices in our neck of the woods, the consultancy said.

#3- Subsidized local fuel prices: The government’s decision to cap local fuel prices in July2021 has effectively absorbed the surge in global energy prices, resulting in virtually no domestic energy inflation.

#4- Flexible labor market: Saudi’s labor market exhibits remarkable flexibility, largely due to the ability to adjust the supply of foreign workers, who make up nearly 80% of the workforce. Non-Saudi employment growth has closely mirrored the trajectory of non-oil GDP growth — when economic activity accelerates, Saudi firms quickly increase their hiring to meet rising demand.

As these firms can easily bring in foreign workers, companies are able to expand their workforce without driving up wages or prices, the note argues.

#5- Steady VAT: Another significant contributor to price stability is that the rate of VAT has remained unchanged for a few years now. Historically, higher inflation periods coincided with the initial implementation of a 5% VAT in 2018 and its subsequent tripling to 15% in 2020.

BUT- Housing costs are the only outlier: Recent revisions to Saudi residential real estate data reveal a substantial 30% increase in property prices since the pandemic. “That is likely to have fed through into the rental market with landlords charging higher rents to tenants. With affordability constrained, demand for rental properties may have increased too,” the research note read.

THE OUTLOOK-

The case for inflation in Saudi Arabia remaining subdued over the next few years is strong. Housing costs, food and beverages, and energy inflation are all expected to remain modest.

Housing-related inflation is anticipated to soften: “A faster increase in housing supply would, all else equal, help to put downward pressure on housing prices and rents; rents make up a fifth of the CPI (the consumer basket),” according to the research note.

ICYMI Supply could be going up indeed: The government has already launched a battery of reforms to stimulate the real estate market, including allowing foreign investment in Makkah- and Madinah-based real estate companies, lifting development restrictions on 81 sq km of land in northern Riyadh, and approving the White Land Tax, in addition to planning the release of 10k-40k affordable residential plots per year.

Food and beverages inflation is also expected to remain subdued, with global food price indices having experienced a decline this year. In addition, China’s producer prices are to continue falling over the next few years, helping push down inflation rates, according to the note.

ALSO- Capital Economics expects energy inflation to remain modest, as oil prices are set to fall to USD 60 / bbl by the end of this year and to USD 50 / bbl by late 2026, the note read. “If Aramco were to adjust prices accordingly that could, all else equal, knock as much as 1.3% [...] off headline inflation. Lower oil prices could feed into falling costs to domestic producers.”

BUT- The government will need to tighten its fiscal policy in response to declining oil prices, Capital Economics noted. A decision to increase the VAT rate or expand the range of goods and services subject to the tax can raise the inflation outlook. Raising other taxes or introducing new taxes also remains on the table, but “would lead to a one-off step change in the price level, rather than lead to a permanently higher inflation,” the note said.

Capital Economics has previously expected inflation to accelerate a little further throughout 3Q 2025 before peaking at around 2.6% y-o-y. As for 2026, it also anticipated inflation to average 0.8% y-o-y. This is considered optimistic when compared to other forecasts. Riyad Capital sees inflation rising to 2.5% this year, before easing slightly to 2.3% in 2026, up from an inflation reading of 1.7% in 2024. The IMF said in June that inflation in Saudi Arabia will remain around 2% this year, supported by the currency’s peg to the USD, domestic subsidies, and a flexible labor supply.

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