Egypt's urban inflation slowed down for the first time in seven months, coming in at 29.7 per cent in May compared to a 30-year high of around 31.5 per cent in April, the Central Agency for Public Mobilisation and Statistics (CAPMAS) recently announced. Core inflation, computed by the Central Bank of Egypt (CBE), also cooled slightly to 30.57 per cent year-on-year in May from 32.06 per cent in April. The CBE believes core inflation is a more accurate measure because it eliminates the prices of volatile items such as vegetables and regulated goods. The drop in inflation is mainly attributed to the fact that it is being compared to a favourable base effect from the matching period last year. The monthly overall inflation stayed relatively unchanged at around 1.7 per cent. These figures “provide the first hard evidence that the inflationary effects of the 50 per cent drop in the Egyptian pound against the dollar since November have started to fade,” said London-based research company Capital Economics. Egypt floated the pound in November 2016, which caused prices to spiral. However, it warned of “another temporary jump in inflation if the government pushes ahead with subsidy cuts, as well as plans to raise the rate of VAT from 13 per cent to 14 per cent.” Both the subsidy cuts and the increase in VAT are scheduled for implementation in the upcoming budget for 2017-18 as parts of the government's economic reform plan. The budget is currently being discussed in parliament. Nonetheless, Capital Economics still believes the trend over the next 12 to 18 months will be towards weaker inflation, adding that the fall in the headline rate was broad-based. “All but one of the 12 major categories of the CPI [consumer price inflation] basket saw inflation ease or remain unchanged last month,” it said. These components include food and beverages, housing and utilities, transport, health, clothing and footwear and education. Capital Economics does not foresee another hike in interest rates before next year. To absorb inflation, the CBE late last month raised its overnight deposit rate by two per cent to 16.75 per cent, while the lending rate was raised to 17.75 per cent. However, Deutsche Bank said in a recent research note on Egypt that “the recent hike may take a long time to transmit into the real economy, and inflation is likely to stay elevated for a while.” Moreover, it said that the CBE might be forced to make another hike in interest rates to contain the effects of the second round of fuel subsidy cuts and the VAT hike. It estimated inflation to range around 30 per cent in 2017 and around 17 per cent in 2018. It noted some risks in the medium term that could push inflation upwards “derived from the uncertain effects of price liberalisation and VAT reforms and commodity price recovery in 2018.”
