Needs-based spending is keeping inflation figures at bay, writes Niveen Wahish "Strawberries cost LE6 per kilo. They never sold for more than LE2.5 per kilo at this time of year," said a shocked housewife, Howaida Abdallah. She takes opportunity of the low prices when a fruit is in season, to cook and store homemade jam for her children. "I cannot afford to buy jam from the supermarket all the time. A jar costs at least LE5." Strawberries aren't the only problem. Vegetables, fish and chicken are all seeing a gradual price rise. But inflation figures seem to show otherwise. According to consumer price index (CPI) figures released this Tuesday by the Central Agency for Public Mobilisation and Statistics (CAPMAS), urban inflation went down to nine per cent in March 2012, compared to 9.2 per cent in February and 11.5 per cent in March 2011. Food and beverage prices saw a lower annual increase of 10.9 per cent, down from 12.6 per cent in February. However, month- on-month (M/M) inflation grew to 1.2 per cent, compared to 0.7 per cent the month before. Though she is not an economist, Abdallah believes inflation indicators are simply not telling the truth. "On the ground, some prices have even doubled," she said. Cairo University professor of economics Heba El-Leithi attributed the discrepancy between people's feeling that prices have risen and official inflation figures, to the fact that the data collection process involves official prices alone, and not black market prices. That being the case, El-Leithi explained, prices of butane gas cylinders are recorded at LE2.5 -- their price at government sales points -- rather than the LE50 they are sold for on the black market. Notwithstanding the figures are telling, according to Monette Doss, research manager at Prime Holdings. Doss explained that lower annual inflation figures are attributed to the fact that demand has been suppressed by high unemployment, lower incomes and low consumer confidence, preventing inflation from hitting double digit figures. Doss said nine per cent inflation is nothing to brag about. "It is an indicator of recession," she added. She pointed out that spending is highest on basic items, especially foods. CAPMAS figures show that inflation for food and drinks alone stood at 1.9 per cent in March. Food and beverages make up around 40 per cent of the basket of products used to measure the CPI. But while spending on food and beverages is increasing, said Doss, spending on hotels and restaurants is shrinking, and forcing many to close down. An economy that is suffering recession, said Doss, should see even lower inflation figures. But, as with last year, in Egypt existing consumption, though suppressed, is being met by supply shortages that trigger inflation. There have been supply shortages in every area from butane gas cylinders and gasoline to red meat, whose supply was negatively impacted by the outbreak of food and mouth disease. While, core CPI computed by the Central Bank of Egypt increased by 1.12 per cent M/ M in March, compared to 0.52 per cent M/M in February. The annual rate increased to 8.68 per cent in March, compared to 7.30 per cent in February. Core CPI excludes from its calculations items that are unstable by nature, such as fruit and vegetables. For that reason, Doss believes that core inflation is sometimes not indicative of real inflation, because fruit and vegetables are the items Egyptians spend most on. However this time around according to Sara El-Nashar, economist with the Egyptian Centre for Economic Studies, the fact that core inflation is rising means that there are more robust inflationary pressures. Furthermore, a factor which could affect core inflation is higher depreciation prospects for the Egyptian pound especially in light of the depletion, albeit slower, of the foreign reserves to $15.1 billion. And the fact that the $3.2 billion loan requested from the International Monetary Fund may not be approved by parliament adds more uncertainty which further fuels fear of depreciation, thus adding to inflationary expectations, explained El-Nashar. She added that if inflationary pressures continue this could trigger the CBE to raise interest rate in its next meeting on 3 May. The CBE keeps its eye on core inflation rather than urban inflation when it takes a decision to raise or cut interest rates. It last raised interest rates in November 2011 after two years of having kept them unchanged. The overnight deposit rate now stands at 9.25 per cent while the overnight lending rate is 10.25 per cent. The discount rate is 9.5 per cent. That increase in interest rate back in November seems to have helped not only curb inflation but also slow down dollarisation as depositors opted to keep their savings in Egyptian pounds to gain higher interest rate. CI Capital in a macro note issue earlier this month showed that starting January time and saving deposits in local currency saw a high single-digit year on year (Y/Y) growth of 6.4 per cent. Meanwhile, they showed that "following its double-digit growth since February 2011 (except in October), demand, time and saving deposits in foreign currency saw a slowed growth and increased by only a single-digit growth of 6.8 per cent Y/Y."
