Inflation subdued in May despite war pressures

Headline inflation edged up slightly to 1.8% in May, matching March’s reading after a dip to 1.7% in April, according to the latest data (pdf) from Gastat. That keeps the headline figure below 2% and signals price stability is holding despite the Strait of Hormuz closure.

The budget took the hit: “A slight uptick in inflation was expected as support measures for the closure of the strait would oscillate in effectiveness.” MENA economist Hamzah Al Gaaod tells EnterpriseAM. Oil revenues earned during the closure offset the costs. “We are likely to see some of the insulation felt in government budgets and debt this year, and for bonds likely in a few years when they mature,” he added.

But the outlook is shifting: With the US-Iran framework agreement pointing toward a strait reopening, Gaaod expects inflationary pressure to ease from here. However, tail risk remains until a full agreement is sealed.

There’s a structural floor underneath: The USD peg is keeping import costs predictable, where currency swings are stoking inflation across other emerging markets, Senior Economist at MT Trading Ahmed Chreim tells us. Government price controls and subsidies on basic goods are also playing a role in curbing inflationary pressures.

The breakdown

Housing remained the main driver, adding 0.7 percentage points to the headline figure, with the housing, water, electricity, gas, and other fuels division rising 3.7% y-o-y, led by a 4.7% increase in actual rents.

Elsewhere, personal care and miscellaneous goods climbed 5.6%, driven by a 20% increase in jewelry and watch prices. Entertainment, sports, and culture costs climbed 2.6%, supported by a 4.3% rise in holiday package prices. Ins. and financial services prices also climbed 2.2% y-o-y. Restaurant and hotel services increased 1.7%, transport costs rose 1.5%, and food and beverage prices edged up 0.7%.

Two segments pushed back: Furnishings and household equipment fell 0.5% y-o-y, and clothing and footwear inched down 0.1%. Competitive retail in those categories is part of why the housing squeeze hasn't spilled into a broader wage-price spiral, Chreim argues.

ALSO- The wholesale pressure was more intense, with the wholesale price index (pdf) jumping 4.6% y-o-y in May, up from 3.3% in April. The movement was mostly driven by a 9.1% increase in other transportable goods — including a 59% spike in basic chemicals — and a 1.5% rise in metal products, machinery, and equipment.

AND- Manufacturing costs continued to climb in April. The producer price index(pdf) rose 9.1% y-o-y, accelerating from 5.5% in March, driven mainly by a 9.7% increase in manufacturing prices and a 7.7% increase in water supply, sewerage, waste management, and remediation activities.