The UAE’s inflation hit 11.1 per cent in 2007 mainly due to the steep hike in the prices of goods and services, a minister said citing a research conducted by the Ministry of Economy's consumer price index (CPI) division.

The figure was derived by measuring the percentage change in prices of a representative basket of goods and services consumed by the average UAE household.

CPI research revealed that the 2007 rate resulted from varying increases in the consumer prices of all expenditure groups.

The 'House Rent and Related House Items' category recorded the highest gain among all groups at 17.5 per cent, followed by 'other goods and services' at 16.8 per cent. Increases in the average prices of other expenditure items ranged from 3 to 8 per cent, Sultan Bin Saeed Al Mansouri, UAE minister of economy, said.

Al Mansouri highlighted the importance of the inflation index derived from the CPI.  He described it as an essential and widely-used government tool to draft policies on salary and wages and to adjust consumer income in areas such as transfer payments to social welfare recipients. He added that the index was vital for consumer protection analysis.  

"The 'House Rent and Related House Items' group currently has the highest weight in the CPI at 36 per cent. Based on the actual contribution of the expenditure groups to the 2007 inflation rate, the category emerged as the main cause of inflation, comprising 6.5 per cent of the total 11.1 per cent inflation figure or around 58.6 per cent."

"Other Goods and Services" followed at 1.4 per cent of the total percentage or about 12.8 per cent contribution. The other expenditure groups comprised less than 1 per cent to total inflation.

The CPI Division identified two basic factors that made the rent and household item category a major inflationary source: a significant increase in rental rates in 2007 and the large weight of the category in household expenditure.

Al Mansouri further explained that the CPI used to measure inflation is based on a consumer basket derived from the results of the 1997 'Household Expenditure and Income Survey.'

The index is thus outdated since various goods and services currently consumed by households did not exist during the survey period. The MoE thus established its CPI Division in c-oordination with the International Monetary Fund to upgrade the indexing system.

The enhancement of the CPI will involve several phases, the most important of which is the latest Household Expenditure and Income Survey.

Survey results will be used to construct a new consumer basket which will reflect current consumption trends in the UAE. Monthly inflation figures based on the new consumer basket will be available by early 2009.

Local governments are presently attempting to contain inflation by capping annual rent increases at various levels. The MoE itself has implemented various inflation-related initiatives over the past months, such as convincing cooperatives and private retailers to fix the prices of basic commodities which constitute around 70 per cent of retail trade in the UAE.

The Ministry also recently signed a Memorandum of Understanding with several local cement producers to increase production and thus reduce the prices of building materials. The ministry has also exempted cement and steel from custom duties at all UAE ports.-TradeArabia News Service