Macro Analysis /

Egypt Inflation Monitor: January inflation stable annually with a monthly uptick

    Al Ahly Pharos Securities Brokerage
    11 February 2020

    Inflation picks up; food price inflation strikes

    Inflation in January 2020 stood at 6.8% YoY for total Egypt, unchanged from December’s level and breaking the 6-month long decline started in May 2019. The acceleration started in December and maintained in January relies on the base effect as the inflation 1Q 2019 was lower than the previous 4 months ranging from 13.5% YoY in July 2018 to 19.0% YoY in October 2018 and 15.6% YoY in November 2018. 

    Annually, the highest growing category remains Education, growing at 28.5% YoY followed by Transportation as well as Recreation & Culture, growing at 15.0 % and 13.2% YoY in January. Worthy of attention is the Food & Beverages category reverting to positive growth for the second month after having been negative for 3 consecutive months; growing at 1.0% YoY in January against 0.1% in December and -6.4% YoY in November (its lowest recorded growth rate); representing a halt in food price deflation and a potential broadly stable price path. 

    Monthly inflation in January grew at 0.8% up from -0.2% in December. The highest growing category was Food & Beverages at 2.1% MoM up from -0.8% in December, while the remaining categories remained almost stable. The Food & Beverage category jumped back to its highest level since March 2019 as all food items recorded positive growth rates (against negative rates for the previous 4 months) in addition to Meat & Poultry growing at 2.5% MoM. 

    The inflation reading for urban Egypt rose to 7.2% YoY and 0.7% MoM in January, compared to 7.1% YoY and -0.2% MoM in December. The acceleration in monthly inflation was offset through a stability in annual inflation due to base effect support. The uptick was driven by the Food & Beverage category recording its highest growth rate of 1.7% MoM since March 2019. 

    Inflation driven by its heaviest constituents: Food and utilities

    Annual inflation in January was driven by Food & Beverages contributing to 2.3% of the total 6.8% YoY inflation, followed by Housing & Utilities responsible on its own for another 1.2% of YoY inflation. The reaming categories had minimal participation in total inflation of January. These represent the 2 highest weights in the CPI basket, hence their key impact as they account for 35.8% and 18.1% of total CPI respectively. However, it is notable that Fruits & Vegetables contribution to inflation was minimal in January compared to inflation in 2019. 

    The Food & Beverages category was mostly impacted by the Meat & Poultry category given its weight of 10%; the heaviest item in the Food category in addition to being the fastest growing item in the category. Meat & Poultry alone accounted for 0.6% YoY inflation from the total 2.3% YoY Food & Beverage Inflation. Followed by Vegetables and Cheese & Dairy, each adding another 0.3% to total YoY inflation. 

    On the monthly level, the main contributor to inflation was Food & Beverages responsible for 0.3% from the total 0.8% MoM inflation, while the remaining categories had minimal contributions.

    Inflation to remain below 6% before picking up in September 2020

    Inflation for total Egypt in January came above our expectations of 0.2% MoM and 6.2% YoY. Going forward, the relatively lower inflation rates recorded in January 2019 through May 2019 compared to 2H2018 should create bigger room for YoY growth over the coming months and break with the record-low levels seen from June 2019 to November 2019. Hence, inflation is forecasted to record 5.5% YoY and 0.6% MoM in February 2020, then fluctuate within 5-5.5% YoY during 2020 before picking up again to 6-8% in 4Q2020 where the record-low inflation of 4Q2019 provide an unfavorable base effect. 

    According to our forecasts, inflation should end FY2019/20 with an average of 5.4% YoY. Additionally, we see inflation remaining in the single digits, and within the CBE’s monetary policy target of 9% (+/-3%) all through 2020.

    Rates to be maintained in February; higher chances for rate cut in April

    We expect the CBE to resume a less aggressive easing cycle in 2020, with higher chances for a rate cut in April, than in February. Corridor rates are expected to reach their healthy level of 11.25-10.25% by the end of 2020; whereby we expect a 200-300bps cut in rates over the course of the year, most probably in the April, June and August MPC meetings.