Kuwait Inflation Edged Up, According to Revamped Index

According to the Central Statistical Bureau's revised consumer price index (CPI), inflation accelerated to 3.0% y-o-y in May 2013, from 2.8% y-o-y in the previous month. However, in month-on-month terms prices were unchanged.

The Central Statistical Bureau (CSB) has published a revised series for consumer price inflation, using 2007 as the new base year (previously 2000), as well as altering some of the items that are included in the consumer basket and assigning new weights. The revised weights are derived from the CSB's 2007 household income and expenditure survey.
Monthly data for the new series extends back only to April 2012, although the CSB has also released annual average data for the period between 2008 and 2012. Both sets of data (monthly and annual) have the effect of nudging inflation above the levels previously reported. For example, the old CPI series, which was discontinued in April this year, showed inflation running at a year-on-year rate of 1.6% in that particular month; this compares with 2.8%, according to the new series. In terms of annual inflation, the CSB originally reported an average increase of 2.9% for last year; under the new series this is revised up to 3.2%.
Because some of the categories making up the index have been reformulated, it is difficult to carry out any precise comparisons at a disaggregated level between the old and new methodologies. However, the impact of housing (mainly rents) is now even higher, with an index weighting of 28.9% compared with 26.7% previously. In contrast, the relative importance of food is virtually unchanged, with an index weighting of 18.4%.
The overall trend in inflation will therefore continue to be driven to a large extent by food and housing costs. We expect food price inflation, in particular—which was still rising at a relatively rapid rate in May 2013 (6.3% y-o-y) —to slow in the second half of this year, reflecting subdued global foodstuff prices. In turn, this should help to keep overall inflationary pressures in check.
We shall be revising our inflation forecast to tie in with the updated series, although the overall trajectory—which assumes a gradual pick-up in average inflation from 2014 onwards, driven by robust domestic demand and upward pressure on wages—is unlikely to change. Previously, we forecast Kuwait’s inflation rate of 2.5% in 2013 and 3.5% next year.

Kuwait: Monetary Policy
In general, we forecast Kuwaiti interest rates to remain unchanged at 2.0% for 2013 and 2014 as monetary policy generally tracks those set by the US Federal Reserve as the US dollar (USD) makes up the bulk of the undisclosed, trade-weighted basket of currencies.

The US Federal Reserve had earlier indicated that it will keep interest rates low at least until 2015 before commencing any monetary tightening measures. However, following its plan to end its quantitative easing (QE) programme in October 2013, an increase in the US Federal funds rate is expected to occur earlier than 2015. An increase in US interest rates, possibly in 2014, may prompt the Central Bank of Kuwait to raise its central bank discount rate in tandem with US rates.

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