Macro Analysis / Egypt

Egypt: Inflation hits almost 10-year low on food prices; stable interest rates

  • Annual inflation decelerates on the back of a sharp drop in food prices despite an unfavorable base effect
  • Inflation to remain below 5.5% for the remainder of 2020; accelerating in December
  • No interest rate cut on September 24th
Egypt: Inflation hits almost 10-year low on food prices; stable interest rates

August inflation decelerates to almost 10-year low as food prices decline sharply, and despite an unfavourable base effect

August inflation dropped to 3.6% YoY and fell by 0.3% MoM, compared to 4.6% YoY and 0.2% MoM in July 2020. Despite an unfavorable base effect from a drop in inflation levels back in August 2019, a sharp 2.6% monthly drop in food prices dragged overall inflation down in August and was enough to offset the sharp price surge of 4.8% in transportation cost and of 2.4% in healthcare expenses. Urban inflation moved similarly by declining 0.2% MoM and growing 3.4% YoY, compared to 0.4% MoM and 4.2% YoY in July 2020. The annual inflation achieved in August, both for total and urban Egypt, is the lowest level ever hit (second lowest after October 2019, when it hit 3.1% YoY). 

Both on an annual and monthly basis, the contribution of all 11 non-food categories as a bulk to August’s inflation offset the contribution of the Food & Beverages category. For eight months now, inflation reading has been less and less impacted by food items volatility and more by the broad group of non-food categories, since the fruit and beverages volatility has been tamed relative to 2018 and 2019 fluctuations. However, Food & Beverages category remains the main inflation driver, given its weight of 35% compared to that of any single non-food category such as Utilities or Healthcare (18% and 9%). Food & Beverages contributed 1.2% of the overall 3.6% YoY August inflation, followed by Utilities contributing 0.7% and Healthcare contributing 0.4%. 

Outlook: Inflation to remain below 5.5% until the end of 2020

We expect inflation to stabilize at 4.5% YoY in September and October. Inflation should then fluctuate within 5.0-6.0% YoY during November and December mainly because of the base effect, where the record-low inflation levels in 4Q2019 provides a mathematical disadvantage. As we move through the last quarter of 2020 and a rather stable inflation path, the base effect should diminish and allow for better representation of economic conditions. According to our forecasts, inflation should end CY2020 at an average of 5.1% YoY, which is in line with our initial forecast made in the beginning of 2020, and remain in the single-digit zone, and within the CBE’s monetary policy target of 9% (+/-3%) until 1H2021. 

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