Country Reports - Kuwait

Marmore report: Kuwait’s inflation hits decade high as food prices soar

March 2022

Country Reports - Kuwait

Marmore report: Kuwait’s inflation hits decade high as food prices soar

March 2022

Kuwait: Marmore MENA Intelligence, a subsidiary of Kuwait Financial Centre “Markaz”, recently released a new report, titled ‘Kuwait’s inflation hits decade high’, identifying the inflationary trends in Kuwait and analysing the reason behind rising inflation.

Kuwait's inflation has climbed quickly over time and has now become one of the highest inflation rates among GCC countries. Consumer Price Index (CPI) rose 4.3% year-on-year (y/y) in December 2021 - highest since October 2011, a sharp increase from the 0.1% (y/y) registered in December 2018. The high inflation is mainly driven by a rise in food and beverage prices. The core inflation excluding food and beverage rose 3.7% (y/y) in December 2021, with most components recording a rise in prices. Housing Services, which has the highest weightage of 33.21%, rose to 2.35% (y/y) in December 2021 from being flat since the beginning of 2019.

What drives Inflation?

The Housing Services component turned positive from being flat due to a rise in rents and maintenance costs. Even though the price rise is lower for Housing Services than other components, the weight of this component makes it a significant factor. Rents and maintenance costs rose because of increased demand following travel relaxations from COVID-19 restrictions.

Food & Beverage prices shot up to a peak value of 11.5% (y/y) in June 2021 and continue to grow at 7.2% (y/y) as of December 2021. The prices of meat, fish, and fruits have continuously raised significantly since May 2020. Kuwait’s food & beverage imports form 17% of total imports as of Q2 2021. The rise in the prices of food and beverage is due to the surge in international food prices on the back of strong demand and disruptions in the supply chain. This will further be aggravated by the ongoing geopolitical conflict between Russia and Ukraine, which has pushed up all commodity prices even higher.

The Transportation component reached a high of 5.5% (y/y) in June 2021 and continues to grow at 4.3% (y/y) as of December 2021. Major sub-components that moved inflation were increases in the price of automobile spare parts and air travel. Clothing and Footwear rose to 6.2% (y/y) at the end of 2020 and remains flat since then. The price increase is attributable to several global issues that have an impact on the supply chain, including weak global production and supply, high land and sea transportation costs.

The Education component of CPI was flat until August 2021 and rose 18% (y/y) in September 2021, the highest of all the components. The rise in education fees of pre-primary, primary, and high school education is the reason for this surge as the schools switched from online to offline education.

At present, food price is the major factor that is driving inflation. Food prices have increased due to several reasons including labor shortage, supply chain issues, and heightened consumer demand. It is worth noting that the outlook for food prices remains unfavorable.

Among the GCC countries, Kuwait and Saudi Arabia experienced inflation in food prices from the start of 2020 on the back of a rise in international food prices. However, the remaining GCC countries mostly experienced flat food prices. Prices of food products in Kuwait and its other GCC peers depend on international markets' prices and the costs of importing (trading efficiencies). Nevertheless, GCC nations are trying to reduce their food dependency by investing in agricultural land and technology in their own country and foreign countries.

In line with Saudi Arabia's food security plan, Saudi Agricultural and Livestock Investment Co, also known as SALIC, imported 355,000 tons of wheat from Ukraine, Canada, and Australia in 2021, which accounted for 10% of the country's demands. Likewise, Hassad Food,  Qatari sovereign wealth fund's agricultural arm, has purchased land in Sudan and Australia, as well as plans to invest hundreds of millions of dollars in agricultural projects in Kenya, Brazil, Argentina, Turkey, and Ukraine. Meanwhile, Kuwait Investment Authority is prioritizing developing food security and diversifying its food supply chain and is planning to invest in agricultural lands abroad.

Housing Services prices that largely remained near zero have risen by 2.4% (y/y) in the latest reading. Residential rents are on the rise with demand from expatriates surging amid a relaxation of travel restrictions and subsiding COVID-19 wave. Considering the above and the geopolitical factors, the inflationary pressures could persist in the short term and the IMF inflation estimate of 3% for 2022 in Kuwait offers no solace.