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Sizzling summer inflation
Published in Al-Ahram Weekly on 19 - 08 - 2010

July inflation figures confirm what people are feeling on the ground, Niveen Wahish reports
Last week, the Central Agency for Public Mobilisation and Statistics (CAPMAS) announced the inflation rate for July 2010. Compared to July 2009, July 2010 prices in urban areas are 10.7 per cent higher. Urban areas include Cairo, Alexandria, urban Lower Egypt, urban Upper Egypt, Suez Canal cities and frontier governorates.
Monthly inflation (July 2010 compared to June 2010) meanwhile rose to 2.3 per cent in July 2010. According to the Mid- Year Inflation Update report by Beltone Financial Research, this is a sharp increase from 0.7 per cent in June 2010 and from an average of 0.6 per cent since the beginning of 2010.
The report said the monthly inflation, which is a better reflection of on- the-ground changes, was led by an increase in food prices and, to a lesser extent, the price of tobacco. A note on July's inflation by the Central Bank of Egypt (CBE) said the "sales taxes imposed by the government on tobacco and related products as part of the 2010/2011 budget led their prices to increase by 29.22 per cent month on month [m/m] in July 2010. This accounted for 0.61 percentage points of the monthly headline inflation."
The CBE note also showed that the price of fruit and vegetables increased by 4.48 per cent m/m in July, to contribute 0.67 percentage points to the monthly headline inflation. It added that this month's increase is "significantly higher than the average monthly pace of 0.16 per cent witnessed in the first half of 2010."
Consumers hardly needed to know the figures; they already feel it. Beltone, however, does not find the figures surprising: "The summer months and the period leading up to Ramadan usually see a spike in some food items' and entertainment prices."
The change in prices is tracked by the Headline Consumer Price Index (CPI) that follows the change in prices of a basket of goods. The weights in the basket reflect the relative importance of the goods and services in the household consumption basket, based on the Household Expenditure Survey, which is carried out by CAPMAS every five years. Around 44 per cent of the weight of that basket is dedicated to food items. 2008/ 09 figures by CAPMAS show that Egyptian families spend 43.6 per cent of their income on food.
And it was not only headline CPI that is up. Core CPI computed by the Central Bank of Egypt also increased. Core CPI excludes most volatile items, namely fruits and vegetables, and government regulated prices.
According to the CBE, the annual rate inched up to 7.08 per cent in July compared to 6.70 per cent in the previous month. The figure for July was 1.52 per cent higher than June. That is more than double the "tame monthly pace of 0.63 per cent in the first half of 2010 H1."
The latter, the CBE said was mainly "driven by higher prices of poultry and red meat, while retail prices and paid services remained broadly unchanged." Poultry prices, said the CBE, rose by 7.49 per cent m/m in July, the highest monthly increase over the past four years.
According to Beltone, with core inflation remaining within the CBE comfort zone, of six to eight per cent, they do not expect a change in CBE interest rates, provided gasoline and diesel prices remain constant until the end of the year.
The CBE's Monetary Policy Committee, which meets every six weeks to decide interbank overnight deposit and lending rates and the discount rate had kept rates unchanged since September 2009, at 8.25 per cent and 9.75 per cent for the overnight deposit rate and overnight lending rate respectively. The discount rate was also kept unchanged at 8.5 per cent. The committee next meets mid- September 2010.
"We believe that the CBE is unlikely to address one-off and seasonal influences on prices with interest rate changes which would have a limited effect, if any, on such factors." Beltone said.
Interest rates are one of the instruments used by central banks to curb inflation. A higher interest rate means costlier borrowing, thus less liquidity in the economy. Less liquidity means less spending and lower demand, which leads to lowered prices.
But while interest rates remain unchanged, the CBE did use another instrument to pull some liquidity from the market. It was reported that the CBE withdrew LE50 billion by attracting banks to make seven and 14-day deposits.
Nonetheless, inflation may not drop anytime soon. The Beltone report notes that "annual headline inflation could increase further in August 2010 as the seasonal effect of the summer months and Ramadan continues." In addition, Beltone expects recently announced changes in the prices of natural gas and electricity to be reflected also in August's prices.
The report further sees the annual headline inflation rate remaining in the 11-13 per cent range until the end of 2010. "We believe this level of inflation will be mainly due to one-off and seasonal changes, rather than higher inherent non-food inflationary pressures in the economy," the report said.
The solution to high inflation, according to Omneia Helmy, lead economist at the Egyptian Centre for Economic Studies (ECES), lies in increasing productivity. "As long as we need to import a good part of our basic needs, any increase in international prices is bound to pass through to the local economy," she explained.
While acknowledging the need to change consumption habits to ease demand on food items, Helmy said boosting agricultural production and achieving higher self-sufficiency is a must. The latter requires a combination of factors that include not only supporting farmers, but also improving irrigation systems and improving the "farm to fork" process.
Meanwhile, Helmy said, "there must be closer monitoring of the market, not by imposing prices but [by] a framework that provides for competitiveness, accountability and supervision." That framework is needed, according to Helmy, to protect consumers whose voice cannot be heard, particularly in the absence of mature consumer protection associations.
Helmy does not see a return to mid-2008 inflation levels of 23 per cent, "unless climate change continues to disrupt agricultural production and global food stocks are depleted."

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