The Economist Intelligence Unit indicated in an analysis issued by it that inflation in Kuwait continued at about 3.7 percent on an annual basis last May (it rose to 3.83 percent in June), after it reached this level last March, according to data from the Central Administration for Statistics.
The unit stated that the inflation rate in Kuwait is the highest among the countries of the Gulf Cooperation Council, noting the lack of data on inflation in the UAE, reports Al-Rai daily.
It expected inflation to continue to pressure real domestic consumption in the near term, which reinforces the unit’s expectations that real GDP growth will slow this year to 0.4 percent.
The Economist Intelligence pointed out that with the continued slowdown in consumer price hikes in the Gulf, it seems that Kuwait is facing difficulty in reducing the relatively high rate of inflation, which increased sharply in the wake of the Corona pandemic, due to the very narrow housing market, where the costs of housing services constitute more than one-third of the consumer price basket.
The unit indicated that, in addition to that, the long-term political blockage continues to impede progress in housing construction to meet the requirements of the growing number of residents, which causes a rise in rental and purchase costs.
It also noted that price increases are also caused by the continuous recovery after the pandemic in demand in related tourism sectors such as restaurants, hospitality and transportation (which constitute more than 15 percent of the consumer price basket), with the increase in the number of visitors to the country.
The unit also noted another reason for the high inflation rate in Kuwait, which is that the Central Bank of Kuwait follows a less stringent monetary policy than other monetary authorities in the Gulf, noting that the Kuwaiti dinar is linked to a basket of currencies dominated by the US dollar and is not linked to the dollar exclusively, as is the case with other currencies. In the other Gulf countries, what gives the Central Bank more room for maneuver was evident in its slow rate hike.
The unit indicated that between March and June, the Central Bank raised the interest rate by a total of 250 percentage points, compared to the US Federal Reserve and other Gulf central banks raising the rate by 500 percentage points.
The EIU stated that it believes that the US interest rate peaked in June at a rate of 5-5.25 percent, but indicated that interest rates may return to a rise later this year, given that the US inflation rate is still higher than the 2 percent level that the Federal Reserve targets, pointing to the possibility that the Central Bank of Kuwait will resort to further monetary tightening as a result of any increase in US interest rates.
The unit concluded that it expects a slowdown in the inflation rate in Kuwait from 3.1 percent in 2023 to 2.3 percent in 2024, before settling at an average of 1.7 percent in the years 2025-2027, indicating that this will be driven by a possible decline in demand after the pandemic for tourism-related sectors, the decline in imported inflation with the decline in global commodity prices, and the strengthening of the US dollar after its weakness in the past year.