Annual inflation in the world's No. 4 oil exporter had slowed to 1.3 percent in July, after an inflow of new units pushed rents down and as bank lending remained slow after last year's Dubai debt woes. In August, consumer prices fell 0.1 percent month-on-month after a 0.2 decrease in the previous month, data from the National Bureau of Statistics showed.
Housing costs, at 39 percent the largest consumer expense, fell 0.7 percent on a monthly basis in August due to the weak property market.
Food prices in the UAE, the second largest Arab economy after Saudi Arabia, rose 0.5 percent in August, much lower than during the holy Muslim month of Ramadan last year as the country introduced price controls and subsidies.
"Both trends — decline in rents and rise in food prices — should continue for a little longer," said Giyas Gokkent, chief economist at the National Bank of Abu Dhabi.
"Inflation will remain contained in low single digits this year and even next year but there will be an upside next year," he said.
Food prices usually rise sharply during Ramadan, which ended in August, as families enjoy more elaborate evening meals after breaking their daylight fast. They jumped 2.7 percent month-on-month in September 2010, when Ramadan ended in the first half of the month.
The UAE, which has escaped the public protests that have rocked nearby Bahrain, Oman and Yemen, said in May it would fix the cost of about 400 foodstuffs and household products until the end of the year.
It also called on retailers to offer discounts of up to 50 percent during Ramadan.
UAE Economy Minister Sultan bin Saeed Al-Mansouri said in May he expected inflation between 1 and 1.5 percent this year.
Analysts polled by Reuters expected average inflation of 2.5 percent in 2011 after 0.9 percent last year, which was the lowest annual level since the Gulf war started 1990.
A survey showed this month that growth in UAE private sector business activity plunged to a 15-month low in August and selling prices fell in August after eight successive months of output price inflation.
