Egypt inflation: Price hikes in April as Ramadan’s inflationary pressures lag

  • Ramadan inflation hike lagged to April
  • Expect stable inflation levels through 2021 below the CBE target of 7.0% (+/-2.0%)
  • No rate cut on 17 June 17th despite strong carry trade attractiveness

Inflation jumps on lagged Ramadan food price hikes

Inflation for total Egypt saw a jump in April to 1.2% MoM and 4.4% YoY, compared to March’s slight pickup of 0.6% MoM and 4.8% YoY. Urban inflation saw a similar surge in prices to 0.9% MoM and 4.1% YoY. The price hikes reflect a lagged effect of Ramadan on inflation, as suppliers usually expect a rise in domestic demand and raise prices to benefit accordingly. Although this usually happens in the month preceding Ramadan, this year it was during Ramadan, coinciding with April.

Food & Beverages was the category that saw the highest growth in prices in April; growing 3.0% MoM, followed by Healthcare growing at 1.4%, while the remaining categories remained broadly unchanged.

Annually however, Food & Beverages record the sharpest price decline of 0.3% while the most price hike is visible in the Education category at 29.7%. Transportation follows with a price rise of 7.6% and healthcare at 5.3% YoY.

Annual inflation is driven by non-food items while Food items take over monthly inflation

Inflation has stabilised over the past few years and food price volatility was relatively tamed. On an annual basis, most of April’s inflation was driven by non-food items with a minor contribution from food items. Monthly, it was the opposite; most of inflation was driven by food items as well as fruits and vegetables, while a very minor contribution was due to non-food items. The constitution of inflation this month reflects the type of price hike that occurs in Ramadan, which is usually food centered.

A closer look shows the highest inflationary pressure in monthly inflation was Food & Beverages, contributing 1.0% from the total monthly 1.2% inflation level, with the remaining 0.2% brought in by the remaining categories. On the other hand, the strongest inflationary pressure on annual inflation was Education, contributing 1.6% of the total 4.4% annual inflation, followed by Utilities contributing 0.8% and Healthcare contributing 0.5%. Together, those 3 categories account for more than half of the inflation level recorded in April.

Minor pick-up in inflation over the next four months, but still below CBE inflation target

Inflation this month came above our forecasts as we had factored in a muted month in April to follow the Ramadan effect occurring in March, while the Ramadan effect has actually been reflected in April’s inflation. We see inflation stabilizing around its current path, hovering tightly around 5.0% and remaining below the CBE target of 7.0% (+/-2%) all through 2021, with a more pronounced pick up in August and September. Inflation for total Egypt should end 2021 at an average of 5.4% and FY20/21 at an average of 5.1% while urban inflation should end 2021 at an average of 4.9% and FY20/21 at an average of 4.5% YoY.

No rate cut on 17 June despite strong carry trade attractiveness

The CBE has kept interest rates unchanged since the beginning of the year, as it monitors the signs of macro recovery, and the economy’s reaction to various fiscal stimulus packages as well as the rollout of vaccines and the resumption of business activity.

Meanwhile, the fear of US treasuries rallying up as the market anticipates a recovery-led inflation, started to dissipate. US employment data released this weak came as a disappointment to exaggerated market expectations of a stronger recovery dependent on vaccine rollouts. In reaction to the news, US treasury yields have slightly dipped back from its previously high levels, which supports the idea that the Fed will stick to its accommodative policy well into 2022 as planned.

Egypt remains the most attractive EM destination for carry trade, offering the highest real yields among its peers, which has led to a quick recovery of foreign holdings of treasury to almost USD 20 bn in February 2021. The CBE is likely to prioritize those gains and postpone resuming cuts to a later stage.

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