Abu Dhabi inflation rises 4.7% in January as drop in rentals subdues VAT

Inflation in Abu Dhabi rose 4.7 per cent in January on an annual basis as a decline in rentals tempered the 5 per cent VAT implemented at the beginning of the year, according to official data.

Month-on-month, prices rose 3 per cent, Abu Dhabi's Department of Economic Development (DED) said.

The consumer price index rose to 112.7 in January 2018 compared to 107.6 per cent, the DED said in a statement on Tuesday. The gains were also propelled by a 100 per cent excise tax placed on fizzy drinks and tobacco in October. The department said rental rates dropped 2.7 per cent but otherwise didn't give a detailed breakdown of January inflation figures.

"The increase in consumer prices inflation is completely reasonable compared to the results of January 2017 as a result of the implementation of the value added tax in the country at 5 per cent which started last year," the DED said.

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"We remain of the view that, although the incidence of VAT would add cost push pressure to consumer prices, demand factors are likely to pull the consumer price index down rather than up," said Bilal Khan, Dubai-based senior economist for the Middle East and North Africa and Pakistan at Standard Chartered.
"While the impact would vary across sectors, on balance, we expect the one-off impact of VAT to persist over 2018."

In January the UAE implemented VAT as part of the country's efforts to diversify its sources of income. The move also comes in the wake of a three-year slump in oil prices that saw the value of the commodity lose more than half of its value. Authorities in the Emirates have also reduced energy subsidies which has led to an increase in prices. However, the rise in energy and the increase in goods and services has also been accompanied by a decline in housing costs, which have a 31.2 per cent weighting in the inflation index.

Economists have argued that VAT is unlikely to cause a huge spike in the cost of living at time when rents, one of the major monthly expenses for residents, have gone down. According to government officials, VAT is expected to net an estimated Dh12bn in the first year and Dh20bn in the second year of the levy. That's likely to give a shot in the arm to the economy, and will ultimately boost hiring, according to economists.

"A jump in inflation was expected in January with the introduction of VAT and higher fuel prices," said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

"However, the continued fall in rental prices helped to partly dampened the rise. We see consumer demand softening in the immediate aftermath of VAT being introduced, in part due to front-loading of expenditure, though expect some stabilization in the second half of 2018."