We have lowered our inflation forecast, in line with official data showing that consumer prices rose by a lower than expected 5% year on year in the first quarter. The jump in international foodstuffs prices has had a surprisingly minimal impact in the kingdom, in part because the authorities have increased wheat imports to ensure that there is a plentiful supply of subsidised wheat, and prices elsewhere have also remained subdued. However, narrow money (M1) has leapt in recent months, as the government's recent generous public-sector pay handouts have boosted liquidity, indicating potential demand-push pressures down the road. With the king announcing a second round of social spending pledges in mid-March, we expect this pressure to increase, lifting average inflation this year to 6.6%, from 5.4% in 2010. However, with global food and non-oil commodity prices expected to decline from 2012, the rate of inflation is likely to slow significantly next year and to remain subdued for the remainder of the forecast period. We expect consumer price growth to average 4.3% in 2012-15, although housing shortages will support rental price inflation throughout the forecast period. There is a risk of a renewed inflationary spike, as in 2008, given the weakness of the policy tools available to contain inflationary pressures. A weakening dollar, and thus a weakening riyal, will add to the risk of imported inflation.