Inflation holds at 1.8% in July despite geopolitical tensions

Inflation remained steady for the third month in a row, with headline prices remaining at 1.8%, matching June and May rates, despite the renewed US-Iran conflict and Houthi threats, according to the latest data (pdf) from Gastat. The stable inflation “should be read as evidence that Saudi macro management is currently absorbing the shock well, not as evidence that the shock doesn’t matter,” senior economist at MT Trading Ahmed Chreim tells EnterpriseAM.

Resilience despite mounting geopolitical pressures: “On the surface, this is a strong signal of macroeconomic resilience; the Kingdom continues to post one of the lowest inflation rates among G20 economies,” Chreim tells us.

What is keeping inflation in check? Several factors are containing the impact of the rising tensions, including the routing of oil exports through the Kingdom’s Red Sea coast rather than Hormuz, leaving most oil shipments largely undisrupted for now, Chreim says. The inflation is also mainly driven by non-energy costs, reflecting pressures from rents and construction costs rather than geopolitics. Saudi Arabia is using strategic reserves, alternative export routes, and price-monitoring measures to cushion its economy.

The breakdown

Housing is still the main contributor, adding 0.8 percentage points to the headline figure, with the housing, water, electricity, gas, and other fuels division rising 4.2% y-o-y, led by a 4.3% increase in actual rents.

Elsewhere, personal care and miscellaneous goods climbed 2.9%, driven by an 11.1% increase in other personal effects, including a 12% rise in jewellery and watch prices. Entertainment, sports, and culture costs rose 2.4%, supported by a 3.7% increase in holiday package prices. Restaurant and hotel services increased 2%, food and beverage prices rose 1.5%, and ins. and financial services climbed by 1.4%.

Two segments continue to defy the trend: Furnishings and household equipment fell 0.5% y-o-y, while clothing and footwear declined 0.4%. CPI rose 0.2% m-o-m in July, led by a 0.9% increase in the price of housing, water, electricity, gas, and other fuels.

ALSO- Wholesale prices edged up: The wholesale price index (pdf) rose 5.0% y-o-y in July, up from 4.8% in June. The increase came mainly from a 9.7% rise in other transportable goods — including a 66.7% jump in basic chemicals and a 3.9% increase in refined petroleum products — and a 6.2% rise in agriculture and fishery products. Metal products, machinery, and equipment prices also edged up by 1.5%.

MEANWHILE- Manufacturing costs resumed their climb. The producer price index (pdf) rose 8.5% y-o-y in July, up from 7.5% y-o-y in June. This increase was driven by a 9.0% increase in manufacturing prices, a 7.9% rise in water supply, sewerage, waste management, and remediation activities, and a 2.4% increase in electricity, gas, steam, and air conditioning supply.

What’s next?

The inflation outlook depends on how the disruption evolves: A spillover into GCC infrastructure or Hormuz would raise the risk of imported inflation, while higher Red Sea freight and marine ins. costs could feed into consumer prices with a lag of several months, Chreim says. A sustained disruption to tanker traffic that lifts global oil benchmarks would also shift the policy focus from headline CPI to fiscal risks, as subsidized domestic fuel prices limit the immediate consumer impact, but weaker export revenue could weigh on Saudi’s finances.