Consumer prices in Bahrain fell by 2.1 per cent year-on-year in June, the fourth consecutive month of falls, due to a sharp drop in transport costs and a slight decrease in food prices, data showed on Thursday.

Consumer prices in kingdom have been falling since March as the worst public unrest since the 1990s hits tourism and domestic demand.

On an annual basis, prices in Bahrain declined by 2.1 per cent after a 1.7 per cent fall in the previous month, data from the Central Informatics Organisation showed.

Bahrain last saw a slump in prices on a similar scale in 1986, when average inflation came in at -2.5 per cent for the full year, according to the International Monetary Fund. 

Analysts have said the slump in prices is linked to the unrest -- inspired by popular protests that toppled the leaders of Egypt and Tunisia -- which has hit economic activity and brought tourism to a virtual standstill.

"It's a reflection of the Arab Spring. The economy came to a standstill," said Turker Hamzaoglu, Mena economist at Merrill Lynch. "We know from the financial accounts as well that there has been some outflow."

"It (inflation) is likely to be there, but probably with the second half of the year there is going to be some recovery because the situation has normalised," he said.

On the month, living costs in the kingdom fell by 0.3 per cent after they were unchanged in May.

Transport prices, which account for 12 per cent of the CPI basket, plunged by 1.9 per cent after a sharp rise of 4.1 per cent in the previous month.

"Let's not look at just transport costs coming down but some of the measures the government is trying to do, giving some handouts to the population," Hamzaoglu said.

Social spending of at least $700 million, or around 3.6 per cent of Bahrain's economic output, has been promised to help calm the protests.

Food prices, which make up 16 per cent of the basket, declined slightly -- by 0.1 per cent month-on-month, after a 2.6 per cent drop in the previous month.

Housing costs, the largest consumer expense at 24 per cent of the basket, remained flat in June for the third month in a row.

Standard & Poor's said on Wednesday it had removed Bahrain's  ratings from credit watch negative as political tensions have eased, and on expectations that increased public spending will lift economic growth next year.

Analysts polled by Reuters in June forecast average inflation of 3.0 per cent this year - suggesting prices should begin to rise at some stage. – Reuters