CAIRO: Although the annual headline inflation rate has remained at 13.3 percent for the third consecutive month, Egypt's core annual inflation rose from 6.59 percent to 6.85 percent from November to December 2009. Core inflation is computed by evaluating the weighted price movements of consumer goods and services considered representative of those most regularly purchased by Egyptian households, yet unlike headline inflation, excludes volatile items such as fruits and vegetables or goods with regulated prices such a petrol. In a move to assist monetary policy makers by reducing the "background noise of typical price fluctuations, the government began publishing the core inflation rate in October 2009. Both the core and headline inflation rates are based on the consumer price index (CPI), computed by the Central Agency for Public Mobilization and Statistics (CAPMAS). Although core inflation is up - due to unfavorable base effects from last year, according to the Central Bank of Egypt (CBE) - it is lower than the 7 percent forecast by a Reuters poll. Base effects are defined as the "contribution to changes in the CPI in the base period, or when changes in the CPI in the base month have a considerable effect on 12-month measured inflation. December 2008 saw inflation at 19.38 percent. Investment bank Beltone Financial expressed surprise at the unexpectedly low figure, citing high food prices driven by religious holidays and subsequent increased consumption as driving forecasts for increased inflation. Beltone speculated that calculations may have preceded the increase in food prices, and projected double-digit inflation for January and February, before declining to below 10 percent. Yet inflationary concerns are low, as the government target for core inflation is 6 to 8 percent. Analysts expect the government to maintain interest rates, currently at 9.75 overnight lending and 8.25 deposit, at the next meeting of the CBE on February 4. Simon Kitchen, an economist with EFG-Hermes investment bank, told CNBC that, "Inflation pressure is subdued definitely, and growth was lower in the fourth quarter of 2009 than the third. If inflation keeps falling month on month and growth slows, we could see a further rate cut.but our expectation is for steady interest rates well into 2010. Reham ElDesoki, an analyst with investment bank Beltone Financial, corroborated the expectation for the CBE to keep interest rates steady if GDP growth meets the expected level of 5 percent. "In the absence of any change to energy prices or growth that is higher than expected, we expect GDP growth to be about 5 percent this year. I don't see non-food inflationary pressures emerging. As for food inflation, this should be consistent with expected seasonal fluctuations, she predicted. Egypt's minister of economic development told Bloomberg recently that real GDP growth in the second quarter of 2009/10 reached 4.5 percent, up from 4.1 percent registered the same period last year, but lower than the 4.9 percent in the first quarter. ElDesoki commented further on Beltone's statement that the data collected for headline inflation does not reflect the higher food prices experienced at the end of December. "Usually they [CAPMAS] collect the data around the middle of the month. I expect January's figures will be abnormally high, as food prices elevated by Coptic Christmas will not yet have had time to recover, she said. Addressing the headline inflation rate and its effect upon Egypt's economy as a whole, ElDesoki admitted, "13 percent is high. But it's the trend that [CBE] considers, not just the absolute figure. As long as there is the prospect for inflation to decline, that's the important thing. The Central Bank has a more forward-looking decision making process. Still, notions about appropriate interest rates are far from unified. Some analysts consider the current level of inflation unacceptable. Magdy Sobhy, economist with Al-Ahram Center for Strategic and Political Studies, voiced his frustration with the CBE's continued decision to maintain low interest rates. "Yes, there is the crisis and you have to support investment somehow but keeping the interest rate low is not giving any interest to those with private savings, he told Daily News Egypt. He added, "13 to 14 percent inflation is more than double the range that the Prime Minister talked about one year ago. When the figure for core inflation was first published in October at 6.3 percent, Prime Minister Ahmed Nazif told the media that Egypt is comfortable with core inflation of between 6 and 8 percent, "for a while and would not take measures to reduce economic growth. Sobhy criticized the core inflation rate for ignoring items of vital importance to the Egyptian consumer, fruits and vegetables and petrol. He pointed out that the core rate was intended to show figures independent of seasonal price fluctuations, and yet the fact that it continued to rise should elicit alarm. "Even ignoring these commodities, the rate is going up and up! We have to listen to this and to behave accordingly, he stated. Sobhy agreed with other analysts and CBE that a headline inflation rate of 6 to 8 percent represented acceptable levels for the Egyptian consumer, but "only with growth rates exceeding 5 to 6 percent. Yet engaged in the perpetual balancing act of monetary policy, to achieve the target 5 percent GDP growth for fiscal year 2009/10, the CBE will likely keep interest rates low, perpetuating the condition that Sobhy considers detrimental.
