Rise in cost of living in Dubai driven by silent inflation

Do you find yourself out of cash a week ahead of the end of the month? It happens more often at our end this year. The figures of the food prices in the supermarkets have handsomely rounded in recent years. Candy that used to cost 1 dirham, now proudly shows a price tag 2.50 Dhs. Luxurious products are agressively occupying the shelves where basics use to be stocked. The Nescafe medium-sized jars that cost around 8 Dhs are now hard to find, but Dolche Gusto coffee capsules that cost 2 Dhs a piece (or a cup) are in abundance.

Officially, inflation in Dubai amount to a modest figure of under 1%. But that does not really explain the rising cost of living in Dubai. Moreover, the increase is even more obvious among expats who are the main constituent of Dubai’s population.

According to the government, Dubai’s inflation rate back in April was equal to 0.9%. In comparison, the real estate index in the emirate jumped by 0.8%. That includes electricity, water and other housing expenses. However, the rise in home prices and rents over the last one year varies from 5% to 60%.

Nationals vs. Expatriates

The cost of living in Dubai is not the same, however, for Emiratis and foreign residents. A very generous and effective system protects UAE nationals from the effects of inflation and rising cost of living in Dubai. They rarely rent homes and are not required to pay a housing tax. In addition, they can send their kids to free of charge government schools and are entitled to get aid for their utility bills. On the other hand, foreigners pay 5% of their rent as a housing fee in addition to the rent. Although expatriates make up around 90% of Dubai’s population, they do not enjoy many privileges and benefits that can easy on them the cost of living in Dubai.

As a result, the majority of expats do not think that the Consumer Price Index (CPI) shows the true situation in the city. However, the CPI in Dubai is pretty tricky to measure compared to other places. That is because the population figures in the emirate are rather unstable. Also, the households in the city are very diverse and they all differ in terms of spending patterns.

Even though Dubai felt the destructive effects of the 2008 global financial crisis, currently the emirate’s economy is reviving. It is predicted that it will register a growth of over 3.5% in 2013. In addition, DFMGI (the Dubai Financial Market General Index) has jumped by 44% since the beginning of the year.

Nevertheless, over the last twelve months, rents also increased with by some 5% to 30%. Yet, salaries are not expected to increase in 2013. That is even more worrying, given the fact that about 44% of the people in Dubai did not get a salary last year.

Still Living in 2007

The inaccuracy of the CPI can also be justified by characteristics of the neighborhood included in the survey. The homes are chosen on the basis of standards introduced for the 2007 Household Income and Expenditure Survey.

Back in 2007, many properties in which are now exposed to rising rents, like Downtown Dubai, Dubai Marina and Business Bay, were not even completed. In addition, namely these areas are much preferred by expats. Their popularity plays an important role in the increased rentals.

However, not only rents are jumping. Restaurant bills and school fees in Dubai are also rising. CPI’s sub-index for restaurants and hotels in the city showed an increase of 1.1% this April compared to twelve months ago. In addition, the Knowledge and Human Development Authority allowed nearly 20 schools in Dubai to raise their tuition fees by more than 6%. Consequently, CPI’s education sub-index registered almost a 5% jumped compared to 2012.

The rising inflation is less obvious for UAE nationals who have the right to use free of charge government schools and hospitals, and don’t need to pay rents.

Nevertheless, both Emiratis and expats feel the increase in transportation cost. Over the last one year, the inflation in this area has jumped by 0.8%. That happed when the government agreed to introduce two new toll gates back in April. Nowadays, one can spend on average 300 Dhs for Salik only driving back and forth to work or to school.

Central Bank’s Role

Even though the UAE Central Bank has no problems with the inflation levels, it closely follows the rise in the price of assets. The lending demand rises faster than expected.

Experts warn that the inflation rate may further jump later in 2013, and in particular from October onwards. That is because people in Dubai will search for more affordable homes with lower rents. Also, the rise seen in retail and office space may additionally contribute to this trend. This means that, like in the past, the real estate sector may play a main role in Dubai’s rising inflation.

Economic growth always comes hand in hand with inflation.