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Fadil Almohsen
200901348
FINA 3313 – Money and Banking
Inflation in Saudi Arabia
Section: 102
Instructor: Dr. Mohammad Magableh
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Outline

Introduction on inflation – a general introduction on inflation including the
definition.

How inflation is measured – explaining how inflation is measured.

Causes of inflation – I will talk about the leading causes of inflation.

The inflation rate in Saudi Arabia – talking about the rate of inflation in the
country and illustrating with a graph.

Recent inflation rate – I will discuss some of the recent activity in the Saudi
economy and how the inflation rate is affected.

The Level of Current Performance of Inflation Indicators in the Kingdom.

Conclusion – conclusion of the main ideas.

References – clarifying which websites were used in this research.
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Introduction
Inflation is an expected property of any economy in the world. In other words, inflation is
the rise of general level of prices. However, inflation is a much more complicated than
simply the increase of prices. investopidea explains inflation as "the rate at which the
general level of prices for goods and services is rising, and, subsequently, purchasing
power is falling." As inflation rises, every dollar will buy a smaller percentage of a good.
For example, if the inflation rate is 2%, then a $1 pack of gum will cost $1.02 in a year.
Most countries' central banks will try to sustain an inflation rate of 2-3%. Inflation is also
identified with the fall of market value of money within a particular economic system.
However, some economists prefer to use the term inflation to describe a rapid increase in
money supply in a single economy. Generally, this is the main cause of the increase of
prices. The first reaction to the term inflation is in most cases negative, however inflation
is an indicator of a healthy economy. Generally, minor inflation is a natural phenomenon
of any economy, no matter how strong and stable it may be. One of positive effects of
minor inflation in a separate economy is that it is easier to adjust some relative prices, for
example salaries.
How inflation is measured
Inflation is measured by comparing two sets of goods at two points in time, and
computing the increase in cost not reflected by an increase in quality. There are,
therefore, many measures of inflation depending on the specific circumstances. The most
well-known are the CPI which measures consumer prices, and the GDP deflator, which
measures inflation in the whole of the domestic economy. The prevailing view in
mainstream economics is that inflation is caused by the interaction of the supply of
money with output and interest rates.
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Causes of inflation
There are various factors that contribute to the rise in prices. Some are natural factors like
unfavorable weather conditions which affect the food production and lead to the shortage
of supplies in the market. With more money chasing fewer goods, the price goes very
high. Besides this natural problem there are man-made problems which contribute to the
rapid increase in prices. The trading community which senses a shorting of certain
supplies, especially the important supplies, they resort to large scale hoarding. Hoarding
is the purchase of large quantities of a commodity with the intent of pushing up the
price.
They release the hoarding products after increase in the prices and make a neat
margin over their investment in the hoarded products. They get so much profit but it
waters inflation. Other inflation causes are: increases of the population, rising prices of
imported goods, and increase in wages.
The inflation rate in Saudi Arabia
The inflation rate in Saudi Arabia was recorded at 3.8 percent in October of 2012.
Historically, from 2003 until 2012, Saudi Arabia Inflation Rate averaged 3.8 Percent
reaching an all-time high of 11.1 Percent in July of 2008 and a record low of 0.0 Percent
in September of 2004. Inflation rate refers to a general rise in prices measured against a
standard level of purchasing power. The most well-known measures of Inflation are the
CPI which measures consumer prices, and the GDP deflator, which measures inflation in
the whole of the domestic economy.
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Recent inflation rate
On August 13, 2012 Saudi Arabia’s inflation rate dropped to four percent in July, which
is the lowest in three years, largely due to decreasing costs of food. Food and beverages
prices rose 0.4 percent and rental prices, goods and other services by 0.6 percent in July,
compared to the previous month. As global increases in food costs slow in the third
quarter, the Saudi Arabian Monetary Agency (SAMA) predicts stable inflationary
pressures for Saudi Arabia’s economy.
On October 20, 2012 Saudi Arabia’s annual inflation rate has fallen from 3.8 percent in
the month of August to 3.6 percent in September, recording a three-year low in the
annual inflation rate. As indicated by the Central Department of Statistics and
Information, the low rate can be attributed to the lower rent prices in the Kingdom.
Experts have pointed out that the falling inflation in the country will ease the notion of an
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overheating economy, which will encourage an increase in lending and consumer
spending.
The Level of Current Performance of Inflation Indicators in the Kingdom.
This table below is the most common measure of inflation used for all cities in the
Kingdom. It measures price changes of goods and services for consumers. The table
includes 406 goods and services compiled on a monthly basis from sixteen cities. The
table shows all cities’ cost of living indices, and quarterly and annual rates of change up
to the end of the third quarter of 2012. This table is collected from SAMA and Central
Department of Statistics and Information.
The Table shows that the average general cost of living index registered an increase of
0.9 percent in the third quarter of 2012 compared to the second quarter of 2012. This
increase was attributed to a rise in all the groups except the group of medical care that
remained unchanged.
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Annual
Averages
Groups of Goods
and Services
Quarterly indices
change
change
% change of
of 3rd
of
3rd Q 12 vs
Q 12
annual
corresponding
vs 2nd
average
Q of prev year
Q 12
2011
2010
2011
3rd Q
2011
4th Q
2011
1st Q
2012
2nd Q
2012
3rd Q
2012
General index
128.9
135.3
136.7
138.7
139.5
140.5
141.8
0.9
3.8
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Food and Beverages
148.4
156.1
157.7
159.5
159.7
161.2
163.7
1.6
3.8
5.1
85.7
86.0
86.0
86.4
87.8
88.3
88.6
0.4
3.1
0.4
160.3
172.7
174.7
177.8
182.9
186.4
188.1
0.9
7.8
7.6
House Furnishing
115.7
116.3
116.2
118.3
118.9
119.2
119.6
0.3
2.9
0.6
Medical Care
113.7
114.6
114.6
114.6
114.6
114.6
114.6
0.0
0.0
0.8
90.2
92.1
92.5
92.6
93.6
93.6
93.8
0.2
1.3
2.1
103.2
104.8
103.9
107.4
107.5
107.5
107.6
0.1
3.7
1.7
149.6
163.0
167.3
171.1
167.5
167.1
169.1
1.2
1.1
9.1
Fabrics. Apparel and
Shoes
Renovation, Rent,
Fuel, and Water
Transport and
Telecommunications
Education and
Entertainment
Goods and other
Services
Conclusion
To conclude, I have introduced the topic of inflation in Saudi Arabia and explained the
definition of inflation. I have explained how inflation is measured by comparing two sets
of goods at two points in time, and computing the increase in cost not reflected by an
increase in quality. After that, I discussed several causes of inflation like natural factors,
man-made factors increases of the population, rising prices of imported goods, and
increase in wages. I also have explored the inflation rate in Saudi Arabia, and recent
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inflation rate activity and showcased the level of current performance of inflation
indicators in the kingdom.
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References
Investopidea - http://www.investopedia.com/terms/i/inflation.asp#ixzz2CUylwYZT
Trading Economics – http://www.tradingeconomics.com/saudi-arabia/inflation-cpi
Index Mundi http://www.indexmundi.com/saudi_arabia/inflation_rate_(consumer_prices).html
US-Saudi Arabian Business council - http://www.us-sabc.org/
SAMA - http://www.sama.gov.sa/
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