UPDATE: Saudi Annual Inflation Hits 12-Mo High Of 5.4% In May-CDSI - WSJ.com

Saudi Arabia's annualized inflation rose to 5.4% in May, its highest level since May last year, compared with 4.9% in April due to an increase in food prices and rents, data from the Central Department of Statistics & Information showed Sunday.

But it's still down from a record high of 11.1% in July 2008.

In the month, consumer prices came in at 0.6% for May versus a 0.3% rise seen in April, the CDSI said.

The cost of living index in the kingdom, the Arab world's largest economy, stood at 127.8 points last month, up from 127.1 points in April, and 121.3 points during the same period in 2009, the CDSI said.

The index for rent, fuel and housing-related services rose 9.4% in May compared with the year earlier period, and was 1.1% higher compared with April.

For food and beverages, the index was up 5.4% year-on-year and 0.1% on the month. Saudi Arabia, a mostly desert country with scarce water supplies, imports the bulk of its food needs.

"The price build up witnessed is of little surprise and is expected to continue and peak during the summer months," said John Sfakianakis, chief economist at Riyadh-based Banque Saudi Fransi-Credit Agricole.

"Food prices are not expected to decline much in the next three months and rents are still adding to some upward pressure," he said.

The Saudi Arabian Monetary Agency, or SAMA, the country's central bank, said in February the kingdom could continue to face inflationary pressures during the first quarter of 2010 due to housing demand. But the pressures will be less than in the first quarter last year due to a stabilization in food prices, SAMA said.

SAMA's governor, Muhammad Al Jasser, has said repeatedly that the kingdom will see less inflationary pressure in 2011 and 2012.

Rising demand for housing in Saudi Arabia, which is expected to become more acute in the coming decade due to population growth, is keeping inflation rates at four times historic averages despite the global recession.

Economists expect the world's top oil exporter to see inflation ease in 2010, but it will still remain higher than its historic average of 1% as the government continues to post expansionary budgets.