Monetary experts are questioning the validity of a new index to measure Egypt's rate of inflation, Sherine Nasr reports The Central Bank of Egypt (CBE) launched on Sunday a core inflation index as one of several tools recently adopted by the bank to boost the accuracy of indicators of the health of the Egyptian market. The new index is designed to better measure inflation and to interpret inflationary pressures in the market. Rania El-Mashat, head of the Monetary Policy Division at the CBE, told reporters on Sunday that the core inflation index is an important tool explaining why inflation rates soar. Providing an accurate analysis of core inflation is also believed to help with forecasts; therefore the new index can provide banks, decision-makers and investors with an effective tool in making right future decisions. "The new index would be used as a compliment indicator and it should not be regarded as a substitute for the headline inflation indicator as represented by the Consumer Price Index (CPI)," said a CBE statement. According to El-Mashat, the new index excludes highly volatile components such as vegetables and fruits and also items whose prices are regulated by the government, such as energy products. Both categories currently represent almost 28 per cent of the CPI according to the Monetary Policy Department at the CBE. "The bank will calculate its core inflation by an exclusion method that strips out volatile items that don't reflect underlying or persisting pressures in the economy," said the CBE statement. The reason is that temporary and sharp movement in the price of some CPI components cause headline inflation rate to experience sharp fluctuations and it becomes difficult to distinguish whether these fluctuations represent persisting and underlying inflationary trends or are simply temporary. This exclusion factor by the new index seems controversial to monetary experts. According to Basant Fahmi, a bank consultant, the CBE did not announce the full components to be measured by the new index. "Instead it underlined those components that have been excluded and these are the most important components to Egyptian society," said Fahmi, who added that the majority of nations have adopted a core inflation index with components that are the most important and reflective of their markets. The fact that the new index has excluded vegetables, fruits and energy, while it included meat is illogical to Fahmi. "Are we a meat-indulgent nation? The answer is definitely no," said Fahmi, who explained that the rise in vegetable and fruit prices is by far a more indicative and sensitive issue to Egyptians, the majority of which are struggling to secure these components in their daily meals, while meat and poultry remain out of question to many. "By including meat and ignoring these more effective components we are introducing a theoretical rather than a true and factual index to measure core inflation," said Fahmi. The same scenario applies to energy prices, which will remain subsidised nevertheless, the slightest upsurge in which cause the price of other commodities to rise. In September, the inflation rate reached double digits at 10.8 per cent compared to nine per cent in August, according to statistics released by CAPMAS (the Central Agency for Mobilisation and Statistics). During 2008, inflation rates exceeded a record 20 per cent due to an unprecedented increase in food prices that caused large riots in many Egyptian governorates. Fahmi remains sceptical about the government's recently announced figures on inflation. For example, rice, cooking oils and sugar prices increased by almost 50 to 80 per cent during the past two months. "Thus, talking about an eight per cent inflation rate remains questionable." Although the CBE underlined that the newly issued core inflation index will not be a substitute for the CPI, it is widely believed that the new index will be the basis on which the CBE will decide future interest rates. Targeting core inflation may be an important issue for decision-makers. However, more important issues remain unaddressed. "The increase in the unemployment rate, the increase in non-performing loans in the banking sector, the increase in the level of poverty, the erosion of the middle class and the decline in investment inflows, whether local or international, are all far more important issues to tackle," said Fahmi, who added that the prime interest of the CBE is to tackle these issues and not continue to be concerned with the status of the Egyptian pound versus the dollar, or introducing means to control inflation by adjusting interest rates.
