KUWAIT: Inflation in consumer prices slowed in September, from 3.8 percent year-on-year (y/y) in August to 3.1 percent y/y, as inflation in most of its components, including housing, retreated. Housing inflation eased for the first time in a year. As a result we saw core inflation (excludes food) slip from 3.4 percent y/y to 2.8 percent y/y during the same period. Food price inflation also reversed its upward trend in September. Slowing inflation in most components and a stronger dinar against major currencies (excluding the US dollar), are poised to keep any significant gains in headline inflation in check. Thus, we expect annual inflation to average close to 3.5 percent in 2015 and to ease towards 3 percent in 2016.

Inflation in food prices fell from 5.6 percent y/y in August to 4.4 percent y/y in September as global food prices continued to decline. Local food inflation receded as fish prices were lowered following sharp hikes over the summer, and as international food prices remained in decline. According to the Commodity Research Bureau's global commodity index, international food prices were down by around 16 percent y/y in September. With international food prices set to soften further in the near-to-medium term, upward pressures on local food inflation will be limited.

Inflation in housing services eased for the first time in a year, sliding from a six-year high in June of 6.5 percent y/y to 5.7 percent y/y in September. After witnessing strong gains for a year, particularly in 4Q14 and 1Q15, inflation in this component (mostly comprised of rents) appears to have peaked and we may see it continue to soften in the months ahead.

Inflation in clothing & footwear, and furnishings & household maintenance continued to edge lower in September. Clothing & footwear inflation fell for the sixth consecutive month in September. Inflation in this component continues to see a large correction, following a high base around the same period last year. The stronger dinar is also helping keep inflationary pressures down in this component (most goods in this component are imported). Inflation in furnishings & household maintenance slowed from 3.8 percent y/y in August to 2.6 percent y/y in September.

Inflation in the 'other goods & services' segment also receded further in September. Inflation in this segment, which includes prices of personal care products and jewelry and certain business charges, is witnessing a downward correction. The slowdown can also be explained by the stronger dinar, as most of the items in this segment are imported.

Wholesale price inflation eased in the third quarter of this year, mainly as upward inflationary pressures from its manufacturing component subsided. Inflation in the wholesale price index (WPI) fell from 3.4 percent y/y in June (its last update) to 2.6 percent y/y in September, as a slowdown in inflation in its manufacturing component offset inflationary gains in its agriculture, livestock & fishing and mining & quarrying components. WPI inflation is updated once every quarter. The agriculture, livestock & fishing component gained some ground in 3Q15 on the back of a hike in fish & seafood prices during the same period. However, inflation in this segment is forecast to subside in 4Q15 after fish & seafood prices were lowered.

Inflation in the WPI components is forecast to be moderate in the near-to-medium term. This will help keep inflation in the consumer price index in check and lead to an annual average close to our 3.5 percent projection in 2015.