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The acceleration in worldwide fuel prices due to the Ukrainian-Russian war delivered positive fiscal balances to oil-rich countries, particularly GCC states. Nevertheless, the positive current account balances did not hold these nations immune to inflation. The Russian war and the economic sanctions have triggered a sharp increase in the oil and commodity prices globally. According to the IMF, the Brent crude rose to a seven-year high after the Russian invasion surging to more than $130 per barrel. To avoid market inefficiency and speed transition into clean energy, the UAE follows a market mechanism in the pricing of petroleum products and international prices are allowed to pass through to domestic ones. According to Dubai Statistics Center, the headline inflation rose to 4.71% in May 2022, scoring its highest level since December 2015.

Certain consumer price index (CPI) components act as main drivers for inflation more than others, and the objective of this policy note is to identify the main driver(s) of Dubai inflation using an element-by-element analysis. This note attempts to identify the absolute contribution of the fuel prices to the headline inflation in Dubai. Additionally, the note studies the impact of fluctuations in fuel prices on the CPI index. To the best of our knowledge, this is the first attempt to answer these questions after the war.

Our findings indicate the absolute contribution of the transport component to the year-on-year (yoy) inflation is around 2.2% of the headline inflation during the first quarter of 2022 and 3% during April-May 2022. In line with the literature, the econometric analysis suggests a 10% increase in domestic fuel price adds 0.56 percentage points to the yoy inflation. The study recommends incentivizing the uptake of electronic vehicles, at least until they reach cost-competitiveness with petrol vehicles. This would speed up the transition into clean energy, while reducing the dependence on fuel prices.