KAMCO Invest: Gulf Inflation Within Relatively Moderate Levels Despite Upward Trend

- Gulf inflation rate rises by 2.5 percent at the start of 2026

- Projected Gulf inflation rate of 2 percent in 2028

- Kuwait’s annual inflation rate stands at 2.2 percent in July

A report by KAFI Investment noted that inflation rates in Gulf countries continued to rise in recent months, primarily driven by increases in food and transportation costs linked to the war in the region and disruptions to shipping traffic through the Strait of Hormuz.

The report stated that the United Arab Emirates recorded the highest inflation rate in the region, with a year-on-year increase of 5 percent in September. Oman and Bahrain followed, each recording an annual inflation rate of 3.2 percent. Kuwait recorded 2.2 percent, while Saudi Arabia recorded the lowest inflation rate in the region at 1.9 percent in September.

The report considered that despite the upward trend, inflation rates in Gulf countries remain relatively moderate compared to the broader region, due to energy price support policies, regulation of goods and services prices, and the pegging of local currencies to the US dollar.

Inflation is projected to reach 2.7 percent in 2026, before declining to 2.4 percent in 2027. It is also expected that Gulf inflation will return to 2 percent in 2028, supported by lower commodity prices, continued currency pegs to the dollar, and the maintenance of fiscal discipline in the region.

According to the World Bank, the general inflation rate in Gulf countries rose from 1.5 percent at the start of 2026 to 2.5 percent in July 2026, primarily driven by the repercussions of the war in the region. The World Bank emphasized that Gulf countries are experiencing unusually large gaps between food price inflation and overall inflation, reflecting disruptions in food supply chains and trade routes due to the conflict in the region.

The report addressed the US Federal Reserve’s decision to raise interest rates by 25 basis points during its monetary policy meeting in September 2026, the first such increase in three years, raising the target range for the federal funds rate to 3.75 percent to 4.0 percent, compared to the previous range of 3.5 percent to 3.75 percent.

It noted that Gulf central banks continued to align with the Fed’s monetary policy trends in 2026, keeping interest rates unchanged during the first eight months of the year before following the increase approved in September 2026. Saudi Arabia and Oman raised their repurchase rates to 4.5 percent, while Qatar raised its repurchase rate to 4.35 percent. Bahrain raised its overnight deposit rate to 4.5 percent, and the UAE raised its base rate for overnight deposit facilities to 3.9 percent. Kuwait was the only exception, keeping interest rates unchanged.

The report relied on the latest reading of Kuwait’s Consumer Price Index for July 2026, which rose by 2.2 percent year-on-year and by 0.2 percent month-on-month during the same period, reaching 140.2 points. The increase was primarily driven by a 6.1 percent rise in the food and beverages index, the second-largest sub-index by weight, marking the highest annual growth rate among groups in July 2026. Additionally, the services and miscellaneous goods index rose by 4.2 percent year-on-year, while the housing services index, which carries the largest weight among index components, grew by 0.2 percent during the month.

Thirteen of the 14 sectoral indices recorded increases during the same period, while the tobacco and cigarettes group was the only one that remained stable without change. Prices in the transport group rose by 5.5 percent in July 2026, while prices in the clothing and footwear group increased by 0.6 percent.

On a monthly basis, prices in the food and beverages group rose by 1.1 percent compared to the previous month, primarily driven by an 8.6 percent jump in the prices of fish and seafood, alongside increases in the prices of the grains, bread, milk, cheese, eggs, oils and fats, fruits, sugar and sugar products groups, which outweighed the impact of price declines in the meat and poultry and vegetables groups.

In contrast, prices in the tobacco and cigarettes and housing services groups remained stable without change during the month. Prices in the transport group rose by 0.6 percent due to higher operating costs for personal transport equipment, while prices in the miscellaneous services and goods group fell by 1.1 percent as a result of lower prices for personal luggage.