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Wednesday, 10 March 2021

Inflation edges up in February as education, tobacco costs rise

Annual urban inflation accelerated to 4.5% in February, up from 4.3% the previous month, state statistics bureau Capmas’ latest reading (pdf) showed. The increase came after a drop in January, when the headline rate fell from 5.4%, and in December, when it slowed down from November’s five-month high of 5.7%. On a monthly basis, prices ticked up 0.2%, partly reversing a drop of -0.4% in January. The story is getting attention from Reuters and Bloomberg.

The increase can be attributed to rising education, tobacco costs: It came as education costs surged 30% y-o-y nationwide Philip Morris International hiked the price of tobacco products in early February. Rent also increased on a monthly basis, as well as the price of electricity and cooking gas, Capmas said. The increase in those outpaced a drop in food prices, which fell 0.5% y-o-y after having already dropped in January and December.

Annual core inflation — which strips out volatile items such as food and fuel — remained unchanged at 3.6% in February, according to central bank figures (pdf). On a monthly basis, the core rate dropped to 0.3% from 0.5%.

Approaching the central bank’s target: The headline rate is approaching the lower band of the CBEs target, although still short of 5%, putting it below the 7% (+/- 2%) target the CBE wants to achieve by 4Q2022.

Could a commodities price rally have an impact down the road? There’s “suppressed consumer demand currently,” but the reading will rebound to a monthly average of 0.8% and a 6.4% annual rate due to a potential price shock following the recent commodity price rally, HC Securities Monette Doss said. EFG Hermes, meanwhile, left its forecast for average inflation for the rest of the year unchanged at 6%, head of macroeconomic analysis Mohamed Abou Basha told us. Commodity prices have seen strong gains since the covid-inspired market crash last March, which could put upward pressure on domestic inflation in Egypt. We took a deep dive earlier this month into what it could mean for the economy at large.

The uptick could prompt the CBE to leave rates on hold when it meets a week from tomorrow. Abou Basha is calling a hold and says that “some base effects and rising commodity prices will lift inflation slightly higher in the next few months.” Beltone Financial’s Alia Mamdouh said in a note this morning that with stable food prices stable, especially with commodity prices rising significantly in recent weeks, the CBE is expected to keep rates on hold,

The CBE could also be reluctant to spook foreign debt investors: “While inflation numbers support a 25-50 bps cut in rates, the rise in US Treasury yields and the risk for EM portfolio exits might prompt the MPC to keep rates unchanged,” Pharos’ head of research Radwa El Swaify said.

(See Go With the Flow, below, for everything you need to know about how rising US treasury yields could affect Egypt.)

The CBE’s Monetary Policy Committee is due to meet on Thursday, 18 March to set interest rates. The MPC left rates unchanged during their most recent meeting on 4 February, even when inflation was falling, as it cited muted economic activity.

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