Dubai inflation edged up 0.9 per cent on an annual basis in February, the highest level in a year, as food and transportation costs rose from the previous month, data showed on Tuesday.

The annual inflation in Dubai hovered below one per cent for most of 2010, as lending and property sector remained weak following debt problems experienced by some state-owned firms, although trade picked up strongly. Inflation stood at 0.4 percent in January.

On a monthly basis, consumer prices in the emirate increased by 0.2 per cent in February, after a 0.1 per cent fall in the previous month, data from the Dubai Statistics Centre showed.

The UAE central bank governor said in March he saw inflation in the country ranging around 'very low' single-digit rates.

'Items driving up annual inflation have included transport because of the rise in gasoline prices, and the food category has gone up in line with expectations due to global trends,' said Giyas Gokkent, chief economist at the National Bank of Abu Dhabi.

Food costs, which account for 11 per cent of the Dubai basket, rose by 2.7 per cent in February after a 1.6 per cent drop in January.

The UAE will start subsidising rice and bread next month to combat rising food prices, state news agency WAM reported, adding that the reduction would run from April 1 to the end of the year.

Transport costs rose slightly by 0.2 per cent month-on-month in February, down from 0.3 per cent in the previous month.

'The housing category will continue to play a moderating effect on inflation, but the risk to Dubai CPI is on the upside because of price pressures in other categories. We project that the average Dubai inflation rate might be around one percent at the end of 2011,' Gokkent said.

Housing prices, the largest consumer expense at almost 44 per cent, dropped 1.2 per cent after a 0.1 per cent increase in the previous month.

Rising living costs in Arab countries are one of the driving forces behind the revolts that have toppled leaders in Egypt and Tunisia and are now challenging autocratic regimes in Libya as well as nearby Bahrain and Oman.

The UAE, the world's third-largest oil exporter, has escaped the unrest so far. Its small local population has one of the world's highest economic outputs per capita at over $47,000.

The IMF forecasts Dubai's economy to grow by 2.8 percent this year, up from 0.5 percent in 2010.-Reuters