Egypt's rate of inflation rises to high not seen since 1986 amid energy subsidy cuts

The annual rate of inflation jumped 33 per cent in July

Egyptian inflation soared 33 per cent last month. AFP

Egypt's rate of inflation soared to a  31-year high last month   as a spate of subsidy cuts lifted the price of goods and services.

The annual consumer price index rose 33 per cent  last month compared to the same month last year and rose 3.2 per cent from the 29.8 per cent annual inflation rate in June.

Inflation in the Arab world's most populous nation has been accelerating sharply ever since Egypt devalued its currency in November and conducted several rounds of energy subsidy cuts in order to unlock a US$12 billion loan from the International Monetary Fund. The Egyptian pound has lost nearly half its value since its flotation.

The government last reduced energy subsidies at the beginning of last month when it increased the price at the pump of 92 octane petrol by 43 per cent to 5 Egyptian pounds (Dh1.02) per liter.

Analysts say that it's likely that inflation has peaked and from here it will steadily decline over the coming years as further subsidy cuts are done at a more measured pace, the money supply eases and the central bank adopts orthodox monetary policy measures to tame inflation.

"We think inflation has now peaked and it will start to fall sharply over the next six-to-nine months, and continue to decline beyond that," said Jason Tuvey, a London-based economist at Capital Economics.

"We expect the headline inflation rate to drop to around 20 per cent around the turn of this year and then ease gradually into single digits in 2019."

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The devaluation of the currency hit the country's economy hard but there are signs of improvement already, with foreign reserves reaching a record high last month and the purchasing managers's index, a measure of private sector growth in the non-oil economy, showing increasing signs of stability in the same month.

Firms in Egypt saw a sharp pick-up in input cost inflation but the overall PMI survey last month  showed increasing signs of stability in a country that has been through an elongated period of economic stress, as new orders stopped a 21-month decline.

At the same time, net international reserves rose by $4.7bn to a record $36.04bn last month  as investors poured money into the country after the devaluation made such investments attractive and the government was able to tap debt on international markets. The reserves' rise to a record marks a sharp recovery from the same month last year when reserves had dropped to less than half the current level.

The drop in inflation is expected to lead to a reduction in interest rates which have gone as high as 18.75 per cent in order to combat the rise in prices. Economists at Capital Economics are betting that the rate may eventually go down to as low 10.5 per cent by the end of 2019 as inflation subsidies. That will be a welcome relief to the economy that needs low rates to fuel growth.