On Aug. 11, most of the Muslim world commenced a month of fasting from sunrise to sunset each day. Food price inflation customarily accelerates across the Arab world just before and during Ramadan. Food consumption rises overall, typically placing pressure on the cost of meat, chicken, rice, vegetables and fruits.

Inflation has re-entered the spotlight this year in Saudi Arabia, which is now experiencing the highest rates of inflation in the Gulf region, touching 5.5 percent in June, the highest level in more than a year. Pressure on food prices could become more elevated in the short term due to greater demand in Ramadan as well as short-term external factors, such as higher global food costs caused by some poor harvests (Russia) and a weaker US currency, which tends to push agricultural product prices upward. Although annual rental inflation continues to ease as supply bottlenecks are slowly resolved in the kingdom, this will unlikely prevent any drastic decrease in the headline inflation rate. Keeping these factors in mind, we are raising our 2010 inflation forecast to 5.3 percent from 4.7 percent in expectation that the cost of food, residential rents, goods and services could stimulate prices.

Accelerating inflation in 2010 is taking place against an improving macroeconomic backdrop supported by oil prices averaging $76 a barrel in July, higher oil production, stronger business confidence, gains in retail appetite, higher export flows, better rates of bank credit growth and greater tourist visits. Following a census this year, the government also revised higher the Saudi population to 27.1 million people, including 8.4 million, or 31.1 percent, non-Saudis. There has been no notable decrease in economic activity so far this summer — banks have concluded a number of large financing deals for strategic projects and private investors appear to be building their presence, albeit gradually, in the domestic market. The month of Ramadan usually coincides with a slight slowdown in commercial activity as companies observe shorter working days and take a week-long holiday to celebrate Eid Al-Fitr marking the end of the month of fasting.

The 9.6 percent electricity tariff instituted on July 1, for commercial, government and industrial users could contribute to some inflationary pressures over the coming months for end-users in certain products. Labor intensity, rotation, seasonality, energy intensity and firm size would determine the real impact of the tariff on final production costs. For non-energy intensive users electricity accounts 1 percent-3 percent of the overall production cost. For the energy intensive industries, such as steel, electricity can account up to 15 percent of the final production cost. We estimate the new tariff, on average, for the non-energy intensive firms could add an extra 2 percent in final costs whereas for energy intensive firms, it could add an extra 5 percent-7 percent to final costs.

Housing costs, particularly rents, emerged as the key driver of inflation in 2007 and 2008. While rent inflation remains high, its pace of year-on-year increase declined to 9.2 percent in June compared with 12 percent in December. Over the same period, inflation in food and beverage prices has picked up pace quickly, rising year on year by 6.2 percent in June from 0.9 percent in December. The rise in food prices, particularly over the past three years, has prompted citizens, especially those with fixed and low incomes, to set aside a greater allocation of household expenditures for food products.

While rents remain the biggest driver of inflation over all, food is narrowing in, and if this trend continues, food could become the biggest contributor to headline inflation in the coming months for the first time since late 2007.

Despite some short-term turmoil in crude prices in May stemming from the euro zone debt crisis and risk aversion, oil prices have remained resilient this year at above $75. Between January and the end of July, crude oil prices averaged $78 per barrel.

It was two years ago in July that oil prices hit record levels of close to $150 a barrel before plunging to almost a fifth of that level in a matter of months as the extent of the world’s financial troubles became clear. This July, oil prices averaged $76 a barrel — a level that, while far from 2008 peaks, falls comfortably within a range widely cited as an ideal price for producing and consuming nations. Several Saudi policymakers have argued that oil at $75 or stronger is needed to encourage investment in building capacity to prevent future supply bottlenecks once the global economy has recovered.

(John Sfakianakis is chief economist at Banque Saudi Fransi, Riyadh.)