Egypt’s inflation rate hits 7-month high on the back of price hikes

Urban consumer prices rose due to increases in fuel, electricity, tobacco and food costs

Egypt’s annual inflation rate increased from 4.9 per cent in June to 5.4 per cent in July, the highest since December. AFP

Egypt’s annual inflation rate reached a seven-month high, the state-run statistics agency Capmas said on Tuesday. Prices increased to 5.4 per cent in July, the highest since December 2020, the government agency said.

Capmas attributed the increase from 4.9 per cent in June to a rise in food costs amid higher consumption during the summer months, as well as recent rises in the prices of fuel, electricity and tobacco.

Food and beverages costs – the largest single component of the inflation basket – climbed an annual 4.9 per cent. Transport was up 6.6 per cent, and alcohol and tobacco rose by 2.9 per cent.

Inflation is still very modest in Egypt, remaining at more than a decade low

Mohamed Abu Basha,
head of macroeconomic analysis at EFG Hermes

Prices increased by 0.9 per cent on a monthly basis, from 0.2 per cent in June, mainly on account of the cost of oils and fats, meats, vegetables and housing and utilities.

But inflation is still at the lower end of the central bank’s 5 per cent to 9 per cent target range.

“Inflation is still very modest in Egypt, remaining at more than a decade low,” Mohamed Abu Basha, head of macroeconomic analysis at EFG Hermes, told The National.

“The uptick in July’s numbers was partially driven by unfavourable base effects, which we expect to reverse later this year pushing inflation downwards,” he said.

In the past 15 years, Egypt’s average annual inflation rate was at its lowest in 2006 at 4.2 per cent and its highest in 2017 at 23.5 per cent.

The 2017 peak was driven by subsidy cuts under a government economic reform programme backed by the International Monetary Fund between 2016 and 2019.

The average annual inflation rate decreased to 5.7 per cent in 2020.

To support the economy amid the Covid-19 pandemic, Egypt’s central bank cut its key interest rates in September and November.

During its meeting last week, it kept the overnight lending rate at 9.25 per cent and the overnight deposit rate at 8.25 per cent for the sixth consecutive time.

“The acceleration in inflation has reaffirmed our belief that the Central Bank of Egypt’s rate-cutting cycle has now ended, with the likelihood being that interest rates will be kept on hold at 8.25 per cent for the overnight deposit rate for some time,” Emirates NBD Mena economist Daniel Richards said in a research note on Tuesday.

Egypt was one of the few emerging market countries that experienced a positive growth rate in 2020, according to the IMF. It expects real gross domestic product growth to increase by 5.2 per cent in the fiscal year 2021-2022, up from 2.8 per cent last fiscal year.

Yet, economic activity remains subdued and tourism, in particular, is still struggling as international travel restrictions remain in place.

Global factors, such as higher commodity prices, supply shortages and higher freight costs, are adding to price pressures in Egypt, Capital Economics said in a research note.

In July, Egypt raised domestic fuel prices for the second time this year. And last week, Egyptian President Abdel Fatah El Sisi said it is time to raise the price of the heavily subsidised five-piaster ($0.03) loaf of bread.

“The move would follow others by the administration to increase prices of essential goods, such as fuel, in recent years to rein in the budget deficit and curb the rise in public debt,” James Swanston, Mena economist at Capital Economics in London, told The National.

President El Sisi did not say by how much or when the price of baladi bread would be raised, but it would be the first increase since 1977.

“At the very least, a rise in prices would push up the headline inflation rate,” Mr Swanston said. “This adds to our view that inflation will drift higher.”

Capital Economics forecasts the headline rate will peak at about 6.7 per cent in September, before falling back below the lower bound of the central bank’s target and stay around that level over the next two years.

Mr Abu Basha of EFG Hermes said the central bank remains in a comfortable position and the relative increase in inflation is no cause for alarm.

“​Consumers are relatively benefitting as producers are not fully passing on the rising input costs they have been facing since the beginning of the year,” he said. “Foreign investors in Egypt’s local debt markets are also enjoying some decent returns with the highest real rate in emerging markets and a very stable Egyptian pound.”