March 12 (Bloomberg) -- The United Arab Emirates is trying to cut its inflation rate in half to 5 percent through a series of measures beginning with a cap on some food prices, the economy minister said.

It will be a ``big challenge'' to reduce inflation, Sultan Bin Saeed Al Mansouri told reporters in Dubai today. The government plans to cap prices on 16 basic items and offer discounts at state-owned supermarkets as it attempts to rein in inflation, he said.

The U.A.E. currency's peg to the dollar is ``contributing'' to record inflation, Al Mansouri said. ``Realistically, this is the way we have to look at it.''

Inflation accelerated to records in all six Gulf Cooperation Council states during the past year, fueled by higher government spending and a falling dollar, to which most of their currencies are linked. Federal employees in the U.A.E. were given a 70 percent salary increase at the beginning of 2008.

Inflation in the U.A.E. accelerated to a record 9.8 percent last year from 9.3 percent in 2006, according to the median estimate of seven economists surveyed by Bloomberg.

Inflation Target

``It is very difficult to have an inflation target when you have a dollar peg,'' Marios Maratheftis, head of research for Standard Chartered Plc in the Middle East, said in an interview in Dubai. ``Policy makers don't have the tools - the ability to use the currency and the interest rate - to achieve this target because interest rates are set by the U.S. Federal Reserve.''

Food price caps ``could work in the short term, but the underlying problem is an extremely weak currency,'' Maratheftis said.

The Union Cooperative Society, a supermarket chain established in 1982 by nationals to protect consumers of limited income, expects the initiative to cost it 45 million dirhams ($12.26 million) this year, cooperative chairman Majed Hamad al- Shamsi said. Last year, sales were 1.1 billion dirhams.

The government is also considering building a six-month strategic food reserve to control prices, the minister said.

``The U.A.E. is a small country,'' Al Mansouri said. ``We have limitations on local resources. A strategic food reserve will balance a situation like we have right now, so the government can control prices.''

To contact the reporters on this story: Tarek Al-Issawi in Dubai at talissawi@bloomberg.netAyesha Daya in Dubai adaya1@bloomberg.net

Last Updated: March 12, 2008 10:46 EDT