Bahrain entered the deflationary path in March as rents plunged.

Deflation, unseen in Bahrain since 2002, reached 2.1 percent year-on-year in June after living costs rose by 2.0 percent on average last year.

On the month, consumer prices increased by 0.6 percent in July in their biggest spike since March compared with June’s 0.3 percent fall, data from the Central Informatics Organization showed.

“Inflation for the month was very much in line with our expectations. We expect to see some monthly improvement going forward,” said Monica Malik, chief economist at EFG-Hermes in Dubai. 

Housing costs, which account for nearly a quarter of the basket, remained flat for the fourth month in a row on a monthly basis in July following a 14.2 percent drop in March.

Food prices, which make up for 16 percent of consumer expenses, soared by 2.3 percent from the previous month, which was their sharpest rise in five months, the data showed.

“We’ve also seen a pick-up in price growth in Saudi Arabia and Egypt in July, so this may be related to Ramadan and hence be likely to continue through August,” said Liz Martins, senior MENA economist at HSBC in Dubai.

“The weak dollar is also potentially inflationary. However, going forward, a weak growth environment is likely to keep inflation more contained in Bahrain than in some parts of the region,” she said.

Bahrain’s economy shrank by 1.4 percent quarter-on-quarter in the first three months of 2011 as the turmoil hit businesses in the tourism sector, its first quarterly contraction since the global financial crisis in late 2008, data showed last week.

Analysts polled by Reuters in June expected average inflation in Bahrain, which pegs its dinar to the US dollar, at 3.0 percent in 2011.