CAIRO: While record inflation rates that characterized 2008 have cooled significantly in recent months, local food prices have not followed the same trend. After peaking at 23.7 percent in August, annual urban inflation has been on a steady decline, coming in at 11.7 percent in the year to April from 12.1 percent in the year to March. The figure is the lowest in 14 months, but while inflation is receding on an annual basis, it has increased month-on-month: The nationwide figure for the 12 months to April was 12.2 percent, up from 11.6 percent in the year to March. Although the underlying forces driving last year's inflationary surge have dissipated, inflation remains persistently high, said Mohamed Hassan, associate professor of economics at Cairo University. He pointed to skyrocketing international food prices, government increases to fuel prices, and high levels of economic growth as the three of the most significant factors that drove inflation in 2008. In response, the Central Bank of Egypt (CBE) hiked interest rates repeatedly in 2008, but this had little impact on inflation, says Elena Sanchez-Cabezudo, banking analyst at investment bank EFG-Hermes. That s because "inflation was mainly driven by imported high food prices, she explained. Following the same logic, the CBE has cut interest rates on the back of falling inflation this year, bringing overnight deposit and lending rates to 10 and 12 percent, respectively. Rise and fall While rising international food prices translated into a significant inflationary surge last year, falling prices have not had as strong an impact locally, Hassan explained. "When you have a positive shock, domestic prices, in terms of the speed and magnitude, go up immediately and almost proportionally, he said. On the other hand, falling prices globally do not translate to the Egyptian stage in the same way. This "asymmetric price change is the result of segmentation between the international and local markets, Hassan said - made possible by insufficient competitive forces locally. "I think monopolistic power is the most responsible factor for this, he said. "There is downward price rigidity. So, in this case, with this massive decrease in international food prices, you don't expect inflation to go to 4, 5 percent, Hassan argues. "It's not on the table at all. "Food prices have remained stubbornly high given the global fall [in prices], said Angus Blair, director of research at Beltone Financial. Monthly urban food inflation increased 2.5 percent in April, compared with 2.6 percent a month earlier. Foodstuffs constitute 44 percent of weight of the basket of goods used to determine urban inflation. The increase in monthly inflation during February and March was "mainly fuelled by higher food prices, an April 9 report by Beltone Financial said. The report points to numerous forces keeping food prices high, including "rent-seeking behavior by local vendors. Vendors in the market are being irrational in their pricing, Hassan argued. "Under the slowdown of the economy, the profit margin should go down - and profit margin goes up when you have a boom in the economy, Hassan explained. "The ironic thing, he said, is that the opposite is occurring in the domestic market. Falling prices globally have translated into larger profit margins for merchants who have not adjusted their prices. This, he said, will slow economic recovery. The Beltone report points to other factors including increased dairy prices in February and "the seasonal rise in prices due to the religious holidays and a rebound in some international prices. Still, inflation is expected to continue to fall on an annual basis. "Despite the higher prices on a monthly basis, the strong base effect will lead, in our opinion, to the down trend in annual inflation continuing until inflation reaches single digit levels by mid-2009, the Beltone report said. While Beltone expects average annual inflation to be 6-7 percent in 2009, the investment bank forecasts a rebound in inflationary figures during the coming calendar year. Counter strategies Enhancing price flexibility could prove particularly important if underlying inflationary pressures return. Increased competition and additional large vendors using rational pricing mechanisms should work to reduce price rigidity in the domestic market, Hassan said. Part of a plan to address food price stability by developing consumer complexes countrywide, the state-owned Holding Company for Food Industries, overseen by the Ministry of Investment, opened a hypermarket in Nasr City earlier this year. The move has the potential to discipline the market regarding pricing, Hassan said, noting that the concept is to offer products at low profit margins. Indeed, a February announcement by the investment ministry put the Nasr City hypermarket's food prices at 10 to 15 percent under market prices. However, Hassan also argued that the government must command a sufficient portion of the market to have a disciplinary effect. In another move, last December the government allocated LE 400 million to encourage investment in and development of the internal market. The ministry is also working with investors such as German self-service wholesaler chain Metro Cash & Carry to help ease their entry into the market. Hassan characterizes the trade ministry's efforts positively, but says that they will take some time to bear fruit. "If you attract more chains into Egypt, this will be a very good step in the right direction, he said.
