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UPDATE 2-Rents fuel UAE inflation to 20-year peak in 2007

(Adds details, background, analyst)

DUBAI, June 17 (Reuters) - United Arab Emirates inflation jumped to 11.1 percent in 2007, the highest for at least 20 years, steered by soaring rents as the economy, its currency pegged to the dollar, contends with high world commodity prices.

The UAE, the last of the six Gulf Arab oil producers to release inflation data for 2007, said it planned to modify its consumer price index to reflect price trends more accurately and release data monthly beginning next year.

Inflation has been soaring across the Gulf Arab region, where most states peg their currencies to the ailing dollar, driving up import costs and forcing them to track seven U.S. interest rate cuts since last September.

But rising rents in the UAE, the world’s fifth-largest oil exporter and the second largest Arab economy, led the rise in 2007 inflation to 11.1 percent from 9.3 percent a year earlier, the Ministry of Economy said in a statement.

“The figure is a significant pick up on the 2006 level and is marginally higher than we had estimated,” said Simon Williams, regional economist at HSBC.

“I expect the 2008 figure to be higher still, driven in part by rising food costs and dollar-driven dirham weakness, but primarily by further rapid growth in domestic demand,” he said.

The real estate sector is booming in the UAE, particularly in the emirate of Dubai where foreigners have been able to invest in property since 2002 and low interest rates make holding properties more attractive.

Costs of rent and related household items, which account for 36 percent of the consumer price index, rose 17.5 percent last year, the ministry said.

The “other goods and services” category rose 16.8 percent, the ministry added, without giving a breakdown of how steeply food prices rose.

Inflation in the UAE will probably accelerate to 11.8 percent this year, a Reuters poll showed last month. The poll had predicted a 2007 inflation rate of 11.1 percent.

REGULAR DATA

The UAE is the only Gulf oil producer that releases inflation data annually and usually months after the end of the year. Saudi Arabia, Kuwait, Bahrain and Oman release inflation data monthly while Qatar does so quarterly.

Surging Gulf inflation has fuelled speculation that some Gulf countries may either revalue their currencies or drop their dollar pegs.

Access to more regular inflation data would make it easier to do business in the UAE, a key regional commercial centre, business leaders said.

“If statistics are released on a more regular basis, you are able to build that into your business model and identify trends,” said Peter Riddoch, chief executive officer at Damac, a private, Dubai-based real estate developer.

“Costs are going up, land prices are going up, rents are going up and salaries are going up. There are a lot of inflationary pressures in the current market,” he said.

Calling the current index “outdated”, the ministry said it was working with the International Monetary Fund to use the results of a household income survey to build a new consumer basket.

The basket “would better reflect the prevailing patterns of consumption in the UAE”, the ministry said.

The UAE, Saudi Arabia and three other Gulf states are working toward creating a single currency -- and part of the monetary union project involves the states having an inflation target of no more than 2 percent above the regional average.

Gulf inflation rates have been converging at higher levels, soaring above 10 percent in Saudi Arabia, Oman, Kuwait and Qatar this year.

The spike in prices is temporary and will ease once real estate supply enters the market, UAE Central Bank Governor Sultan Nasser al-Suweidi said this week.

Additional reporting by Daliah Merzaban and Inal Ersan; Editing by Gerrard Raven

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