Kuwait's inflation in the consumer price index (CPI) edged down to 2.6 per cent y/y in November from 2.7 per cent the previous month due to the sixth consecutive monthly decline in food prices, said a report.

This small move masked some notable changes within the sub-components: another sharp fall in food price inflation was almost offset by a rise in ‘core’ price pressures. Going forward, we expect core pressures to continue to edge higher, according to the latest report by National Bank of Kuwait.

But the overall inflation rate is still forecast to average a modest three per cent through 2014, up from 2.6 per cent in 2013, stated the country's top lender.

According to NBK, the food price inflation fell to 2.4 per cent y/y from 3.5 per cent in October, its sixth consecutive monthly decline.

Given the component’s large weight in the CPI (18 per cent), this move subtracted some 0.2 per cent points from the overall inflation rate in November. Food price inflation has fallen from a peak of 6.3 per cent y/y in May, more than accounting for the deceleration in inflation overall over the period, it stated.

Though driven by softer international food prices, the decline in CPI food price inflation has been sharper than the historical relationship would suggest, it added.

On the other side, ‘core’ inflation (i.e. excluding food) rose to 2.7 per cent y/y from 2.5 per cent in October, but the underlying picture was also mixed. The figure was heavily affected by a sharp rise in inflation in the clothing and footwear segment, which jumped to 1.4 per cent y/y from -0.8 per cent in October.

Excluding this, ‘core’ inflation would have been unchanged, said the NBK in its report.

"The increase was driven by a combination of a strong year-on-year base effect, and a sizeable 0.7 per cent m/m rise in November 2013. Still, clothing inflation was very weak through 2013, and remains well below its average of 5 per cent y/y or so of previous years," it noted.

The Kuwait lender said the inflationary impact on the ‘core’ segment, however, was partially mitigated by an intensification of deflation in the ‘other goods & services’ component, to -1.7 per cent y/y from -0.5 per cent in October.

The turnaround in inflation in this category has been precipitous: it stood at over 6.3 per cent y/y in November 2012, it stated.

According to NBK, the decline – and ultimate reversal – of price pressures in the segment has been driven largely by a base effect generated by the price of jewellery.

"Jewellery prices (mostly gold) surged in mid-2012, but those increases have since fallen out of the annual comparison. Prices have indeed edged lower," said the report.

Elsewhere, inflation in the housing services component (largely rents) remained relatively high, at 4.7 per cent y/y. Indeed, they have picked up considerably over the past year, rising from a low of 1 per cent y/y in November 2012.

The Kuwaiti bank pointed out that the price changes in this segment were only surveyed once every three months, and the next change was due in the December data.

"December 2012 saw a sharp 3.2 per cent m/m jump, so a more modest increase this time around would see the y/y rate fall quite sharply. Given the housing component’s large weighting in the CPI, this could provide the context for a meaningful near-term decline in overall headline inflation rate," it stated.

Any such effect, however, is likely to prove temporary, said the top Kuwaiti lender.

On the 2014 outlook, NBK said: "We see inflation edging higher through 2014 and perhaps crossing the 3 per cent y/y mark around mid-year, as some of the factors – such as soft food prices and other base effects – that have been keeping inflation low start to unwind."

Nevertheless, with economic growth still moderate and regional price pressures muted, inflation is unlikely to rise too far over the medium-term, it added.-TradeArabia News Service