Inflation & Consumer Price Index Analysis for Saudi Arabia

The trends of percentage change in the price level as measured by CPI and GDP deflator over the period 1975 to 2021 are presented in figure 1.

It is evident from the figure that the percentage change in GDP deflator is relatively volatile as compared to the percentage change in CPI. Figure 1 depicts that the percentage change in CPI decline sharply from 1975 and reach -1.58 percent in 1987 - reflecting deflation. After 1975, the percentage change in CPI shows little variations throughout time.

Percentage change in CPI remains positive- which shows inflation- except in 1984 to 1987, 1992, 1998 to 2001, 2017, and 2019 in which the economy experience deflation. On the other hand, the percentage change in GDP deflator is highest in 1980, which reflects the economy experienced 37.18 percent inflation in this period.

Further percentage change in GDP Deflator reflects that the economy also suffered from negative inflation (deflation) in1984, 1985,1986, 1988, 1998, 2009, 2015, and 2020. During the Global Financial Crisis of 2009, the GDP deflator reflected deflation of -15.71 percent whereas CPI showed inflation of 5 percent. Similarly, it is reflected by the below graph that Covid 19 pandemic declined the percentage change in GDP deflator (inflation) to -8.69 percent whereas the percentage change in CPI was positive, that is, 3.4 percent.       
Although inflation measured by both GDP deflator and CPI exhibit a similar trend however CPI turned out to be less volatile.

A careful look can help us understand that Saudi Arabia’s GDP is dominated by oil production and the movement in global oil prices is mainly determining the trend in the GDP deflator. For instance, in 1980, crude oil price touched $36.87/bbl, the highest of the 1980s which is reflected in the GDP deflator to 37.8 percent. Similarly, inflation measured by the GDP deflator showed substantial deflation of -26 percent as compared to that of CPI which showed deflation of -3.2 percent when the average crude oil price touched the lowest of the decade, that is, $14.35/bbl. It can be inferred that global oil prices are the major driver of the difference in inflation when measured from CPI and GDP deflator.

CPI only puts 13.04 percent on transportation which is directly linked with transportation whereas economic activities related to ‘Crude Petroleum & Natural Gas’ and ‘Petroleum Refining’ account for around 30 percent of GDP. Another source of variation between CPI and GDP deflator measures is that the consumer basket includes both domestic and imported goods whereas the GDP deflator only reflects price movement in domestic products.