Inflation in the Kingdom has been falling since it touched 18-month highs of 6.1 percent in August, and slowed to a 10-month low of 4.9 percent in February.
"Although inflation fell for another month it should not be a surprise to most since base effects have pushed inflation down as base effects were pushing inflation up same time last year,” John Sfakianakis, chief economist at Banque Saudi Fransi, said.
“However inflation should begin to rise from next month as inflation expectations are rising and prices on food and other general services have been rising more recently and due to the lag effect should be observed in the official inflation numbers in the next few months."
He said additional spending by consumers due to the one-off bonuses announced earlier will add to a bit more price pressures. Inflation could have reached its bottom and it should begin its gradual rise from here on. Global and especially emerging market inflation is rising and that will be reflected later this year. Inflation should average around 5.6 percent this year against 5.3 percent last year.
On a monthly basis, Saudi consumer prices rose 0.3 percent in March, slightly up from a 0.2 percent increase in the previous month, the department data showed.
Year-on-year inflation for most of the components of the cost of living index declined in March, with food prices recording the largest fall. At 4.9 percent, food price inflation is at its lowest level since February 2010. The slowdown in food price inflation is largely attributed to domestic conditions. For example, prices of fresh vegetables are now 20 percent lower than they were in December, Paul Gamble, head of research at Jadwa Investment, said.
"Rental inflation also maintained its downward trend and at 8 percent, was the lowest since July 2007. The April inflation data will determine whether the announcement of the eventual provision of 500,000 new housing units had an immediate impact on rents," Gamble added.
There was a notable increase in inflation in the other expenses and services category owing to a jump in local jewelry prices. This reflects international prices, with gold and silver prices hitting new all-time highs in March owing to investor buying, he said.
Commenting on the inflation report, Jarmo T. Kotilaine, chief economist at the National Commercial Bank, said: "As welcome as this development is, it is likely to represent something close to a near-term low point for inflation. Some of this is just mathematics, with the recent increases in food and rentals largely absorbed in the rate and the headline rate coming out lower from a higher base. However, the main drivers of inflation remain a source of concern."
Global food inflation looks likely to persist due to structural constraints and the supply response will likely prove inadequate in the near term. In the domestic context, the housing market remains tight and the large-scale stimulus spending will further boost demand in the short term. Additional pressures will come from high oil prices and the weak dollar and there is little the government can do due to the backdrop of loose monetary and fiscal policies. While a sudden spike in inflation is unlikely, the coming months are likely to nudge the headline rate steadily higher toward an annual 5.5 percent or so, Kotilaine added.
However, Samba Financial Group, in its Economic Monitor for April report released Wednesday, decided to increase its 2011 inflation forecast to an average of 5.9 percent for this year, with weaker food price inflation not quite offsetting the impact of brisker domestic demand and rising import prices in riyal terms.
"Our 2012 forecast is unchanged at 6 percent, but we have reduced our 2013 forecast a couple of notches on the expectation of greater housing supply helping to soften the rental market," the Samba report said.
But analysts say demand will be boosted by the recent government package which will see inflation averaging 5.6 percent this year, leading the Kingdom's central bank to keep interest rates unchanged at 2 percent.
Custodian of the Two Holy Mosques King Abdullah offered $93 billion as part of a spending package in March. Finance Minister Ibrahim Al-Assaf said last month that the country may see some temporary inflation from increased social spending.
