The average household in the UAE earns just over AED 18,000 per month, according to a survey by the UAE Ministry of Economy in 2016. This household earning figure fluctuates as salary averages rise and decline from year-to-year. One usually stable metric, is the average earnings a household spends on inelastic household staples. According to the survey, a given household spends on average 10-14% of its income on basic household items. This is far below the third of income that is spent on rent and another quarter that is spent on schooling.
In our Cost of Living UAE Report 2016/ 2017, we track both the aggregate Consumer Price Index reported by the UAE government, as well as the average change in basic household goods. The former is plotted below:
The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The basket is set fixed and each year the government measures the change in the index compared to the index year (where the CPI=100). In late 2016, the UAE CPI was around 107.07, indicating a 7% increase in prices compared to 2014 (which was used as a base year in the analysis)
A common criticism of the CPI is that it tends to overestimate, or underestimate inflation. 2 biases that underestimate the true inflation level are very relevant in the UAE – 1) The CPI carries a bias for old products and does not include new products. For example, the CPI may include electricity costs, but will not include the new mandatory 3% rent surcharge imposed in Abu Dhabi. Another example is that the CPI would not include the cost of mandatory health insurance that UAE employees have to pay for their dependents. 2) An additional bias is the outlet bias. The CPI assumes all households shop at the same outlet. In fact, prices in the UAE for household goods vary by outlet. Higher-end outlets may increase prices at different rates than lower-end outlets.
Both the new product bias and the outlet bias cause the CPI to be limited in how much of the true inflation it reveals. Instead, at Bridge the Data, we have tracked, for more than 10 years, our own in-house created basket of household goods. We track the cost of an item in several stores of varying quality and discuss separately whether there are new products and surcharges that have raised a household’s expenses.