Urban consumer inflation in Egypt unexpectedly eased to 11.87 percent in the 12 months to May as food prices fell from April, the state statistics agency said on its website on Thursday. The average forecast for the country's most closely watched inflation indicator by three analysts polled by Reuters was 12.5 percent. Inflation hit its highest rate in a year in April, reaching 12.1 percent on the back of soaring food prices, which had also contributed to the mass protests that toppled President Hosni Mubarak in February. Anti-government protests fuelled by soaring prices, unemployment and demands for democratic reforms brought much of Egypt's economy to a standstill for nearly three weeks until Mubarak resigned on February 11. Food and beverage prices, which have a 44 percent weighting in the basket Egypt uses to measure inflation, fell 0.5 percent in May from a month earlier, driving the slowdown in the overall figure, analysts said. That compares to a 2.6 percent jump in April from March. "Generally, fruit prices are volatile," Mohamed Abu Basha of EFG-Hermes said. "Vegetable and dairy prices fell month-on-month and therefore both are the drivers of the surprise." Core inflation, which strips out subsidised goods and volatile items including fruit and vegetables, accelerated to 8.81 percent in the year to May from 8.76 percent in April, the central bank said on Thursday. Egypt's central bank is expected to keep interest rates steady at its Thursday meeting, given a weak macroeconomic backdrop and stable non-food inflation. But the inflation figures showed increases in the cost of housing, water, electricity, gas and fuel, as well as furniture and equipment, pointing to a trend that analysts said will be closely watched. "It remains to be seen whether such non-food inflation recurs in the next few months," Abu Basha said, adding that it was unlikely that interest rates would be changed this month. "The central bank might be keeping an eye on non-food inflation over the next few months given today's reading, to see whether it's a one-off or not." A collapse in tourism and foreign investment following the political turmoil has hit government revenues, and economists estimate the economy of the most populous Arab country contracted 7 percent in January-March from the previous quarter. The Finance Ministry said in a statement posted on its website on Sunday that the economy was likely to grow only 3.2 percent in the 2011/12 financial year, which begins next month. The government's previous growth forecast was 6 percent. It said high global food prices, distribution bottlenecks and a planned increase in the minimum wage would keep inflation at a "low double digit level" in 2011/12.
