Saudi Arabia: Baseline Macroeconomic Forecast, Case Study Example

What are the items in the basket used to measure CPI in Saudi Arabia and how does it differ in the basket for USA as provided in the slides?

The items that are used in the basket to measure CPI in Saudi Arabia include food products and beverages, making up about 26 percent of the total weight. Renovations and rent for housing, fuel for transportation, and water make up about 18 percent of the weight.  Transportation and telecommunications make up 16 percent of the basket. Other important factors include home furniture, which makes up 11 percent as well as fabrics, clothing and footwear, which make up 8 percent. Education and entertainment make up 6 percent of their calculations and medical care makes up 2 percent.  Other expenses and services come in at around 13 percent.

In the United States, housing makes up the largest percentage of the basket, at 41 percent it is almost half.  Next, transportation makes up about 17 percent while food and beverages make up 15 percent.  Education, communication, and medical care make up around 7 percent each, and recreation makes up about 6 percent.  Finally, apparel makes up around 4 percent of the basket, and other miscellaneous goods and services make up around 3 percent.  The most striking difference between the two baskets is the amount of weight that housing has in the CPI for the United States.  This is more than twice as much then for Saudi Arabia.  Furthermore, it seems that medical care has a bit more weight in calculations for the United States.

Discuss the historical trend of inflation rates and its possible reasons

The historical trend of inflation rates for Saudi Arabia in the past few years has been coming due, largely, it seems, because of the declining cost of food products that are able to find themselves into the lives of consumers.  In this sense, while many newly planned building projects have been unable to lower the inflation rates for housing, an influx of foodstuff has been able to offset this trend, and allow their rate to decrease. “A series of good harvests and decent growing conditions have seen agricultural commodity prices fall quite sharply this year. For Saudi Arabia, the most important commodities are wheat and sugar, both of which have come down in price.” (Reeve 7)  This is primarily due to the importance of this particular basket item in relation to the calculations that are done for CPI and inflation.

While inflation rates are going down, though, it seems that the overall money that the economy brings in has been going down.  In this sense, while in the past, their oil exports were an important factor in their GDP, recent years have shown a trend of this slowing down. While this would seem to hurt the economy, the ability for them to lower interest rates through a strengthened dollar, as well as by focusing their profits elsewhere, has allowed for the inflation rate to remain low, despite the pace of the economy slowing down.  “Thus, although rental inflation will likely remain fairly robust, we think that this will be more than offset by weakening external pressures, and overall inflation is expected to remain comfortably below 2.5 percent through the forecast period.” (Reeve 7)

Compare the cost of living in Saudi Arabia now versus 20 years using CPI data

Over the last 20 years, the CPI of Saudi Arabia has grown by almost 16 percent.  From 1995 to 2005 it went up around 8 percent.  Over the next 10 years, that amount would double for the consumers of Saudi Arabia. This is primarily due to their quickly growing economy, which allowed for the costs of consumer goods to increase at about the same pace.  While the costs for basic important good such as food and beverages has met the demands of inflation, the cost of housing has not been able to keep quite the same pace.  This had been leading to a decrease in the ability for individuals to afford important daily goods, even while the cost of living remained relatively low.

Coming out of a recession during the last years of the first decade of the new millennium, citizens in Saudi Arabia were seeing increasing costs to all types of surplus, form food to beverages, to housing, and even education. However, as the country adapts to changes in the commodities it exports, by decreasing the amount of oil it relies on selling, they are currently bouncing back from the recession economically. This has begun to offset inflation, and bring the cost of living back into a manageable position for those in the country.  This trend of decreasing CPI for Saudi Arabia is expected to continue, as the post-recession economy of Saudi Arabia adapts to the changing economic climate.

In this way, the state of the Saudi economic inflation and CPI rates have been largely influenced by the country’s rapid rate of growth over that specific timer period.  The fast paced buildup of economic activity, followed by a lag in productivity around 2008, had a profound impact upon the rate of the country’s changes in CPI.  While the economy grew quickly, it outpaced the ability of the individual citizens to maintain their way of life.  However, in the last few years, as the country has adapted to these changes, the ability for average individuals to spend has moderately increased.

Works Cited

Reeve, James. Saudi Arabia: Baseline Macroeconomic Forecast. Samba Report Series. 2015. Samba Financial Group.

Saudi Arabia Inflation Rate. Trading Economics. 2000-2015. 2015. http://www.tradingeconomics.com/saudi-arabia/inflation-cpi.

Saudi Arabia Consumer Price Index (CPI). Trading Economics. 2000-2015. 2015.  http://www.tradingeconomics.com/saudi-arabia/consumer-price-index-cpi.

The World Bank. Saudi Arabia: Data. IBRD/IDA. 2010-2015. 2015. http://data.worldbank.org/country/saudi-arabia