Inflation higher than expected, driven by food and beverage price increases
The monthly inflation rate for total Egypt was 1.0% in May 2019, higher than April’s 0.4% and breaking the downward motion of March and April 2019. The annual inflation rate rose to 13.2% in May from 12.5% in April, showing a broadly stable reading since the beginning of 2019.
The monthly inflation jump in May was mainly attributed to Food & Beverages rising to 1.3% MoM from 0.3% MoM in April. A negative growth of 2.6% in Vegetables came on the back of falling cucumber and pepper prices, which was offset by a significant growth in Fruits by 18.1% MoM explained by the prices of lemons rising 63.7% MoM and bananas 32.5% MoM. The medical care category grew by 3.1% MoM in May, its highest level since May 2018, due to a rise in the cost of medical appliances and equipment by 5.5% MoM.
The annual inflation rise in May was also dependent on Foods & Beverages rising 14.2% YoY, underlined by the growth of Vegetables 35.8% YoY on the back of increases in prices of Tomatoes, Potatoes and Onions as well as a 29.4% growth in Fruits, its highest level since November 2018 where it stabilized below 12% until May 2019. Housing & Utilities scored its regular 15.3% YoY growth supported by electricity prices up 26.9%, butane gas up 49.7% and gasoline up 42.8% YoY in May.
Annual inflation to maintain stability; Monthly inflation to accelerate in the summer
Inflation in May came slightly above our expectations of 12.8% YoY and 0.5% MoM, which was based on the surprisingly low April inflation. Going forward, we expect annual inflation to hover around 14% during the summer as the period between June – August 2019 will witness anticipated fiscal consolidation measures as well as a historically high inflation season. The stability in annual inflation is mainly driven by the high-base effect, especially of higher energy prices were enacted before the end of June.
We see inflation accelerating to monthly rates higher than May’s reaching a peak of 3.0% MoM in June 2019 as a response to the next round of fuel subsidy reforms and until September, when fiscal consolidation impact should have faded. In addition, by the end of the summer, the Back-To-School season begins which generally pushed prices around 1% MoM. We are adjusting our year average inflation expectation from 12.4% to 12.8% for the calendar year of 2019.
Rates to be maintained till 4Q2019
With the stated inflation path over the course of 2019, we expect rates to remain on hold until 4Q2019, when we expect to witness another 100-200 bps cut(s).