In the first month after the implementation of a 5 percent VAT in UAE, the inflation (and the price of consumer products) jumped to almost double. According to the national statistics agency, the inflation rate increased to 4.8 percent year on year, which is the highest since 2015, and almost double of December 2017’s 2.7 percent rate.
However, the inflation rate is being kept in control from increasing further by the weak status of real estate industry of the country.
This is the first time when the UAE is levying an official fixed tax from its citizens. The VAT was launched with the aim to improve the economic status and strengthen the financial condition of the region.
VAT Impact on Prices and Inflation
Within the first two months of the VAT launch, a few products and services saw a hike in prices. This includes a 7.2 increase in the prices of food and soft drinks. At the same time, the cost of transport rose to 12.8 percent, mainly due to the increase in gasoline prices.
This has greatly affected the living cost in general and common people are not eagerly welcoming this change. However, the government is positive that the prices will go back to normal eventually.
The inflation for January 2018 was previously predicted to 3.4 percent which was increased to 4.4 percent after a revaluation of the January data. The decrease in the growth of fuel prices has further influenced a moderation in the January inflation rate.
The VAT impact on inflation of consumer goods was supposed to be seen in a few months, however, the quick rise in inflation indicates that the VAT is already showing its impacts on consumer prices.
As for the long-term impact, the government is confident that the benefit by VAT to state finances and economy would certainly overcome this short-term rise in inflation and decrease in demand. The revenues generated from the VAT and better oil prices would eventually result in a balanced economy position for the UAE in 2018.