Monday, 11 August 2014

Egypt’s inflation accelerates in July

Inflation in Egypt increases to 10.6% and is set to rise further as the full impact of the cut in subsidies is realised.

July inflation data for Egypt were published yesterday. These are the first figures on inflation following the government’s decision to reduce its energy subsidies early last month. The headline figure showed annual inflation accelerating from 8.2% in June to 10.6% in July. Monthly inflation—where the effect of subsidy reduction is more pronounced compared to the annual number—was 3.1%, the highest increase since January 2008. Looking at the drivers of this figure, three things stand out.

First, the direct impact of subsidy reduction on prices has been lower than expected. For example, the “housing, water, electricity, gas and fuel” component of inflation rose by only 3.0% in July, despite double-digit price hikes for several energy products. Similarly, the “tobacco and related products” item rose by 14.1%, less than expected given the government’s recent decision to increases taxes on cigarettes and alcohol. (See this for a list of cigarette prices before and after the tax increase.) If the inflation figure for July has not fully captured the effect of energy subsidy reduction and tobacco tax hike, then we should expect further increases in the prices of these two components next month. 

Second, the second round effects of the tax/price hikes are yet to be fully realised. For instance, “transport” costs rose by 11.2% in one month from June to July reflecting the rise in fuel prices, while prices at “hotels, cafes and restaurants” rose by 4.4%. Prices of these two components might rise further after the full incorporation of higher energy prices, implying additional contribution towards inflation from these two categories in the future.

Third, food price inflation in Egypt accelerated to 2.7% despite recent declines in international food prices. This rise could be only temporary due to the effect of Ramadan, and we might see a moderation in this component going forward.

In this sense, Egypt has been quite fortunate that the reduction of subsidies coincided with falling international food prices. Things could have been a lot worse if energy price increases were coupled with food price inflation similar to the one witnessed in mid-2008 or 2010, especially with food accounting for 40% of the consumer price index basket.

Overall, annual inflation will probably increase further as the direct and indirect effects of energy and tobacco price increases get fully incorporated, notwithstanding lower food price inflation. This is unlikely to spur the Monetary Policy Committee (MPC) of the Central Bank of Egypt into further action in its next meeting. Instead, the MPC may choose to wait and see if its pre-emptive interest rate hike last month would prove sufficient to curb inflation.