By Pratap John
Qatar’s domestic inflation will mainly be driven by rising rents in response to higher land prices and the growing population, QNB said as the bank forecasts overall CPI inflation to average 3.5% in 2015.
Lower international food prices are likely to keep foreign inflation low, thus partly offsetting the rise in domestic inflation, QNB said in its latest “Qatar Monthly Monitor”.
However, it said there was a risk that large investment spending and the growing population could lead to supply bottlenecks owing to limited domestic capacity.
“This could push up domestic prices more than expected in our baseline forecasts,” QNB said.
Rent inflation has accelerated in recent months in line with QNB Group projections, tracking movements in the underlying price of land.
According to the latest Ministry of Justice data, land prices increased by 73% year-on-year in October 2014. This continues to put upward pressure on rent inflation with a six-month lag.
The combination of rapid population growth and higher GDP per capita are leading to a strong increase in the demand for housing, pushing up real estate prices.
As the population expands and per capita income rises, both a base and an income effect push land prices higher. This is likely to continue over the coming years, in line with the favourable outlook for the Qatari economy.
According to QNB Qatar’s Consumer Price Index (CPI), inflation for October 2014 moderated to 3% year-on-year (from 3.6% year-on-year in the previous month).
On a month-on-month basis, inflation edged up 0.1% relative to September 2014.
Housing and rents (the largest component of overall inflation with a 32.2% share) rose 8.1% year-on-year in October 2014, leading to an acceleration of domestic inflation to 3.7%.
Counterbalancing these domestic inflationary pressures, foreign inflation moderated to 1.3% in October as lower international commodity prices feed through into lower domestic price.
In particular, food prices were down 0.6% year-on-year in October.
Qatar’s population grew by 9.7% year-on-year in November to reach 2.27mn.
An additional 202,000 people joined the population over the last one year, QNB said.
Population growth in recent months has been driven up by the large ramp up in infrastructure spending in preparation for the 2022 FIFA World Cup.
The latest population figures for November are in line with QNB’s forecast of 10.1% average population growth for 2014 –one of the world’s highest population growth rates.
In turn the larger population will feed into higher economic growth by boosting aggregate demand and investment in housing and services, the report said.