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Egypt Consumer Prices (Aug.)

Egypt’s headline inflation rate jumped to a near-four-year high of 14.6% y/y in August as the impact of the weaker pound continued to filtered through. Inflation is likely to rise a little further over the rest of this year and with the pound set to be allowed to depreciate at a faster rate too, we think this will prompt a further 150bp of interest rate hikes, to 12.75%.

Weaker pound pushing up inflation; CBE waits in wings to hike rates

  • Egypt’s headline inflation rate jumped to a near-four-year high of 14.6% y/y in August as the impact of the weaker pound continued to filtered through. Inflation is likely to rise a little further over the rest of this year and with the pound set to be allowed to depreciate at a faster rate too, we think this will prompt a further 150bp of interest rate hikes, to 12.75%.
  • The headline rate – which covers urban consumers only – climbed from 13.6% y/y in July to 14.6% y/y in August, the fastest pace recorded since November 2018. (See Chart 1.) This left inflation further above the Central Bank of Egypt's (CBE’s) inflation target range of 7±2%. On a monthly basis, prices rose by 0.8%.
  • The breakdown of the data showed that the rise in the headline was driven by higher food and non-food inflation. Food and beverages inflation picked up for the first time since April, from 22.4% y/y in July to 23.1% y/y last month. This was due to sharp increases in inflation of breads and cereals and vegetables.
  • Our measure of non-food inflation rose to 10.4% y/y in August, its highest reading in more than three years. Transport inflation climbed to 17.8% y/y on the back of higher cost to purchase vehicles and to use transport services. There were also jumps in recreation and culture and hotels and restaurants inflation, possibly a sign of re-opening price pressures during the peak summer tourism season. That said, inflation rose in all other major non-food categories (see Table 1) which probably reflects the impact of the weaker pound.
  • Looking ahead, we think that headline inflation will accelerate over the rest of this year. Officials look set to allow the pound to weaken at a faster pace and fuel prices are likely to be hiked further to reflect high global energy prices. We expect that inflation will peak at around 17% y/y in Q4.
  • The CBE left interest rates on hold August’s meeting. Allowing the pound to gradually weaken – it has fallen a further 6% against the dollar since March’s devaluation – has eased some of the pressure on officials to act to shore up the balance of payments position. That said, with inflation set to rise further and the pound likely to fall faster, we think that policymakers will opt to resume the tightening cycle soon. We have pencilled in a total of 150bp of hikes, taking the overnight deposit rate to 12.75%, by the end of this year.

Chart : Egypt Consumer Prices (% y/y)

Sources: CAPMAS, CEIC, Refinitiv

Table : Egypt Consumer Prices* (% y/y)

Consumer Prices

Food & Bev

Housing

Transport

Health

Clothing

Education

% m/m

% y/y

% y/y

% y/y

% y/y

% y/y

% y/y

% y/y

May

1.0

13.5

24.8

7.4

5.8

4.0

7.5

12.7

Jun.

-0.2

13.2

22.4

7.6

6.3

4.2

8.9

12.7

Jul.

1.3

13.6

22.7

5.2

17.0

5.0

10.0

12.7

Aug.

0.8

14.6

23.1

5.6

17.8

5.7

11.2

12.7

Sources: CAPMAS, CEIC, Refinitiv. *Based on series for urban households.


James Swanston, Middle East and North Africa Economist, +44(0) 207 808 4991, james.swanston@capitaleconomics.com

James Swanston Middle East and North Africa Economist
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