Strong Dollar, Moderate Fuel Prices Set To Lower Dubai Inflation In 2025

"We forecast that annual inflation will further slow to an average of 2.8 per cent year-on-year in 2025. While transport costs will continue to weigh on the overall inflation figure, the strong dollar is expected to alleviate price pressures in other areas of the CPI basket, albeit somewhat offset by ongoing upward pressures in housing," the analysts noted.

Transport, which constitutes approximately 10 per cent of the CPI basket, continued to drag down the annual inflation rate in December, with prices declining by 4.9 per cent year-on-year, compared to a 4.3 per cent drop in November. Although the decline is less pronounced than earlier in the fourth quarter of 2024-when transport prices fell by 10.6 per cent year-on-year in October-the influence of lower oil prices and, consequently, petrol prices remains significant.

In December, the price of Super 98 petrol was down 11.8 per cent year-on-year, and in January, fuel prices remained stable, with Super 98 priced at Dh2.61 per liter, reflecting a 7.5 per cent decrease from January 2024. Analysts forecast that Brent crude will average $73 per barrel this year, down from $80 per barrel in 2024, suggesting that transport costs will continue to exert downward pressure on the overall inflation rate.

Beyond transport, most other components of the CPI basket showed modest price movements in December. Food and beverage prices rose by 1.3 per cent year-on-year, up from 1.1 per cent in November, while categories such as tobacco, restaurants, accommodation, information and communication, and clothing and footwear remained in deflationary territory. Several factors contribute to these subdued price increases, including the ongoing strength of the dollar, which reached multi-year highs against several key currencies in the final quarter of 2024. With expected interest rate differentials, robust growth in the U.S., and persistent political uncertainties in various countries, we anticipate that the dollar's strength will continue in 2025, helping to keep inflationary pressures in check.

Another factor contributing to the soft pricing environment is the competitive landscape in Dubai's business sector, which has prevented many firms from raising prices despite squeezed profit margins. The latest Purchasing Managers' Index (PMI) survey for December indicated that firms did increase their output prices for the first time in three months, but this was only at a modest rate. Additionally, the disruptions to Red Sea shipping that had previously impacted shipping costs are expected to diminish, reducing their influence on firms' input costs in 2025.

While most components of the CPI basket are experiencing only modest increases or are in outright deflation, housing costs are likely to keep the headline inflation figure in positive territory throughout 2025. Housing constitutes approximately 40 per cent of the CPI basket, and in December, housing prices rose by 7.2 per cent year-on-year, consistent with the growth rates observed in October and November.

The housing component of Dubai's index recorded an average growth of 6.7 per cent year-on-year in 2024. Rental and purchase costs for housing continue to escalate, with average prices for apartments now 65 per cent higher compared to December 2020, and average rates for villas and townhouses having more than doubled.

“While Dubai's inflation outlook for 2025 appears favourable due to a strong dollar and stable fuel prices, the ongoing challenges posed by rising housing costs will require close monitoring and may impact overall economic sentiment in the emirate,” analysts said.