CAIRO: Urban inflation fell to 13.5 percent in February, down from 14.4 percent the month before, the state statistics agency CAPMAS announced yesterday. Nationwide inflation edged to 14.2, up from 14 percent. The decline in urban inflation was less than many analysts had expected, owing mostly to an unforeseen increase in food prices. Investment bank EFG-Hermes, for instance, predicted urban inflation would fall to 12.3 percent in February. "While the drop in inflation was in line with our expectation, we find the month-on-month increase in food prices surprising, said Mohamed Abou Basha, an economist at EFG, in a statement to investors. Foodstuffs account for more than 40 percent of the basket of weighted goods used to determine the inflation rate. The average price of foods in urban areas rose by 2.4 percent in February, after falling 0.5 percent in January. Prices of fruits and vegetables increased more than others, suggesting that the hike may be a seasonal, though it is too soon to say whether or not it indicates a large trend, Abou Basha said. The prices of commodities such as oil and wheat have plummeted across the world since last fall. Yet the declines have not always been reflected in local markets. Prices in Egypt fall more slowly than international prices for a number of reasons, according to analysts. First, the local market is fragmented, meaning that it does not respond efficiently to international shifts. Second, information about price shifts spreads slowly. Third, some vendors try to profit from consumers' expectations after prices rise, even if they fall again. "Some vendors have higher cost inventory and so are not taking prices down. Others are taking advantage of [the fact] that demand is not lower and are not reducing prices, said Reham ElDesoki, senior economist at investment bank Beltone Financial. In general, however, analysts predict that inflation will fall throughout the next few periods, pointing to downturns in manufacturing, tourism and other sectors in the fourth quarter of 2008 as well as the continuing descent of international commodity prices. The prices of alcohol, tobacco, clothes, housing and other key goods remained mostly unchanged in February. Analysts at both Beltone and EFG predict inflation will average between 15 and 16 percent this fiscal year. EFG expects inflation to fall to 5.2 percent in the fiscal year 2009-2010, said Abu Basha. As inflation recedes and the effects of what the International Monetary Fund recently labeled the "Great Recession worsen, many have called on the Central Bank of Egypt (CBE) to trim interest rates, hoping it will spur economic activity. Last month the CBE cut overnight rates by 1 percent, to 10.5 percent for deposits and 12.5 percent for lending as inflation appeared to ease up. EFG analysts expect the central bank will snip their lending rates by another 100 basis points at a meeting later this month. The CBE could cut rates by as much as 200 to 300 basis points over 2009, said ElDesoki, the Beltone economist. The bank raised rates six times in 2008 as global commodity prices and, by extension, local inflation rates hit unprecedented levels.
