Macro Analysis /

Egypt Inflation Monitor: June surprises with single digit inflation; rate cut now possible

    Al Ahly Pharos Securities Brokerage
    11 July 2019

    Inflation much lower than expected with one-month delay on subsidy cuts

    There was a monthly “deflation” of 1.0% in June – a rare episode – versus an inflation of 1.0% in May. The annual inflation rate fell to 8.9% in June from 13.2% in May, hitting single digits that were last seen in 2016, preceding the liberalisation of exchange rates. 

    The monthly deflation was supported by base effects, as fruits and vegetables saw a remarkable surge in prices in May; the mom deflation in June reflects the return to regular prices. The food & beverages category hit -2.3% in June compared with +1.3% in May, hitting its lowest level since December 2018, while non-food categories fell back to their usual growth rates after the increase in May. 

    The annual decelerated inflation in June was also dependent on base effects, as most categories fell to July 2018 levels or hit all-time lows. The food & beverages category fell 9.7% yoy, down from a growth of 14.2% in May and hitting its lowest level since July 2018 on the back of vegetables growing by 17.6% in June (down from 36.0% in May), as well as meat, cereals and dairy products hitting their all-time lowest growth levels in June. 

    The rise of various other categories was also notable, such as fruits growing at 40% yoy in June (29.4% in May), reaching its highest level since August 2017. As did the recreation & culture category, growing at 17.0% yoy ( from 8.2% in May) hitting its highest level since April 2018, and 7.5% mom (0.6% in May) in June. However, this was not enough to offset the declines in other categories, given the low weight attributed to recreation & culture in the CPI basket. 

    Inflation once again driven by food & beverages 

    Food & beverages contributed the most to annual inflation in June, at 5.3%, while the remaining 3.6% were from the non-food categories. Within food & beverages, the main drivers were fruits and vegetables, contributing 3.56% to annual inflation followed by cereals contributing 0.8% to annual inflation. The biggest contributor among the non-food items is housing & utilities, which raised annual inflation by 0.7%, followed by education at 0.6%. 

    Annual inflation to remain in the single digits

    Inflation in June came well below our expectations of 14.0% yoy and 1.5% mom, which was based on the fuel subsidies being alleviated in July, but still impacted by the expectations for subsidy and electricity cuts. This changes the outlook for the rest of the year as we see annual inflation remain in single digits between 8.0%-9.0% in July-November, and end 2019 with an average annual inflation of 11.0% (FY 19/20 of 11.4%). 

    We see monthly inflation rates reaching a peak of 3.5% mom in July as a response to the alleviation of fuel subsidy and higher electricity tariff, and again in August and September as the summer season and the back-to-school season generally push prices c1%-2% mom. 

    Potential rate cut

    As the fuel subsidy lift was postponed to July from June – allowing for the base effect to support inflation into single digits – the outlook for the rest of the year has changed. We therefore see considerable room for the Central Bank of Egypt to make a 100-bp interest rate cut at their next meeting on 11 July.