Abu Dhabi's inflation rate jumped to an annualised rate of 12.88 per cent during the second quarter of this year as the cost of food, housing, and energy rose markedly over the past year, according to the Department of Planning and Economy (DPE). The new figure was notably higher than the two most recent quarterly figures. The inflation rate was 11.5 per cent during the first quarter of the year and 10.7 per cent in the last three months of 2007 compared to the same quarter of the previous year. The DPE announcement arrived amid some signs that inflationary pressures may be easing in the country. The dollar has enjoyed a rally against all major currencies in August, and posted its biggest monthly gain against the euro since the euro's creation in 1999. This has taken some of the pressure off import prices as the dirham has strengthened with it. Although prices increased in the second quarter, the figures also provided evidence that drops in global food and energy prices may be helping to mitigate inflation in the emirate. The price of several key groups of goods that were fuelling inflation earlier held relatively steady between March and June. Rent and energy prices, which the DPE bundles together in its calculations, increased only 0.01 per cent during the second quarter of 2008. Additionally, food prices fell by 0.29 per cent during the measurement period, probably due to a drop in global rice prices. Inflation is a common economic malady throughout the Gulf, where most currencies are pegged to the dollar. Gulf economies rely heavily on imports for many essential goods, so the dollar's recent decline has driven prices up throughout the GCC. Massive spending on infrastructure and other major construction projects has also stoked demand, pushing prices higher. And high oil prices are contributing to inflationary pressures, as windfall oil revenues flood the Gulf economies with cash. Faced with rising import prices, many Gulf countries have chosen to boost subsidies for food and public services using oil income, a path that often only worsens the problem, according to some economists. "When you subsidise goods, you're injecting pure cash into the economy, which only increases inflation," said Philippe Dauba-Pantanacce, a senior economist at Standard Chartered Bank. "By trying the mitigate the consequences of inflation in this way, you only fuel the problem." Saudi Arabia said yesterday that inflation reached 11.1 per cent in July, the highest level in the last 30 years. The main causes were similar to those in Abu Dhabi, with food and housing costs climbing disproportionately. Food and beverage costs in Saudi Arabia rose 16 per cent in July, while the combined cost of rent, fuel, and water, jumped 19.8 per cent. Meanwhile, the governor of Kuwait's central bank attributed the country's record inflation levels to factors beyond the country's control, including the rising cost of imports. Although Kuwait is the only country in the region that does not rigidly fix its currency to the US dollar, the currency has generally depreciated along with the greenback, pushing up the price of imported goods for Kuwaitis. Bahrain, where inflation has been lower than in other GCC countries but still a problem, said recently it was considering delaying some of the big construction project blamed for pushing inflation higher. Mr Dauba-Pantanacce said cutting back on its public spending budget is a risky effort to slow inflation without increasing subsidies or abandoning its dollar peg. "The Saudi government has mentioned several times in recent months that it may limit public spending, and now Bahrain is saying the same. But they have to be careful which projects they cut, since public spending is the main way these economies increase diversification," said Mr Dauba-Pantanacce. @email:tpantin@thenational.ae