Inflation rose steadily in 2010, reaching 6% in December, up from just 2.1% at end-2009. Higher international food prices (18% of the consumer price index) were a key factor in the rise. However, in January the inflation rate fell back to 5.2% as the food price subsector of the index fell by 0.8%, while most other prices were broadly flat. Nevertheless, the recent strength of international oil and other commodity prices suggests that inflation rates will pick up again in the first half of this year, and we forecast that inflation will average 6.5% in 2011. The emir's recent decision to increase transfers and benefits to citizens will only serve to add to inflationary pressures in the economy. Some strengthening of the dollar in 2011 will contain price pressures, and we expect inflation to average 4.3% over the remainder of the forecast period. The government's extensive subsidy system-which would be expanded if imported inflationary pressures rose strongly-will prevent higher inflation, as will more cautious credit growth and lower regional liquidity than in 2005-08.