Inflation much lower than we had expected, Supported by a strong base effect
Inflation in July 2019 hit a four-year low of 7.8% YoY for total Egypt against 8.9% in June 2019, enforcing the single digit inflation trend further. The low CPI level was attainable on the back of high inflation in July 2018 (base effect) and disinflation recorded in November 2018, December 2018, and June 2019.
Monthly inflation registered a small growth of 1.5% in July 2019, supported by negative 1.0% inflation in June 2019. The highest growing category was Housing & Utilities, hitting 7.9% MoM and hitting its highest growth level since June 2018 after remaining unchanged since August 2018. This was followed by Transportation growing 5.8% MoM in July after remaining unchanged as well since July 2018. The Food & Beverages category did balance it out, sine it grew by only 0.5% MoM in July compared to negative 2.3% MoM in June on the back of Vegetables growing 3.7% MoM after falling 10.0% MoM in June.
Annually, the Foods & beverages category grew by 8.0%, its lowest ever growth rate on the back of vegetables growing by 12.1% YoY, their lowest growth as well. The remaining food items also hit their lowest growth levels such as Cereals, Cooking oils and Cheese & Dairy. Non-Food items as well saw items such as Tobacco growing at unprecedented low rate of 2.5% YoY from 9.3% in June, and Furnishing & Household Equipment growing at 1.8% YoY in July from 3.6% in June 2019.
The few categories that grew annually In July more than in June were Housing & Utilites at 1.8% YoY and Transportation at 7.5% YoY, despite being generally lower than their trend levels.
Inflation finally driven by non-food items monthly, but not annually
On the monthly inflation front, the highest contributing category was the Non-Food group, registering on its own 1.3% of the monthly 1.5% inflation level. Followed by Foods & beverage category scoring 0.3% MoM. For the first time, the highest contribution to monthly inflation is coming from the Housing & Utilities category scoring on its own an inflation of 0.87%, reflecting the effects of the electricity subsidy alleviation.
Annual inflation on the other hand, remains highly driven by Foods & Beverages scoring 4.4% of the annual 7.8% inflation level, followed by the Housing & Utilities category hitting 1.03% of inflation. The remaining 2.4% are brought in by the remaining non-food items.
Core inflation in July hit 5.9% YoY and 0.11% MoM, both hitting all time low levels. The Gap between Headline and Core inflation started to close as of June 2019, suggesting inflation is on its way to rely less on volatile items such as Food & Beverages.
Annual inflation to remain in the single digits
Inflation in July came below our expectations of 3.5% MoM and 9.5% YoY, as the base effect of high inflation levels still creates a cushion for tamed inflation levels. We see this trend continuing as high inflation numbers in September, October and November 2018 will create room for smaller YoY growth for the coming months.
We see inflation persisting in the single digits all through 2019, ending the year with an average of 9.4% YoY, and ending FY 2019/20 with an average of 10.3% YoY. Our expectations for August are 1.5% MoM growth and 7.6% YoY inflation.
Rate cut more possible on September 26th than on August 22nd
With inflation hitting single digits, we see the environment appropriate for a 1% rate cut in 3Q2019. The chances are higher in the September 26th meeting than the August 22nd meeting though, noting that the global retraction of funds from EM last week, which might signal potential pressure on FPIs might support postponing the rate cut until later in 2019.