Annual urban inflation fell back from its 20-month high in October as the rate of increase in food prices dipped from the month prior, according to official figures (pdf) released yesterday by state statistics agency Capmas. Urban inflation slipped to 6.3%, down from 6.6% in September, which was the highest reading since January 2020.

Why the dip? A serious slowdown in non-food inflation, which fell to 3.7% from 4.6% in September. This is the slowest pace in more than a decade, according to Capital Economics which attributed the fall to a decrease in rents and slower clothing and education inflation.

But food prices continued to accelerate: The slowdown elsewhere offset food and beverage prices, which rose to 11.5% on an annual basis in October from 10.5% the month before, the highest level in two years, according to Capital Economics.This was primarily driven by a 4.6% increase in red meat and poultry prices.

Housing utilities and gas prices inched up 3.1% on the back of a third hike in fuel prices this year, while recreation and culture jumped by 14.7%, the biggest increase in urban inflation for the month.

But don’t let the favorable base effect fool you: Inflation continued to accelerate on a monthly basis, rising to 1.5% in October from 1.1% the month before. This was driven by a 12.7% rise in education prices and a 6% hike in the recreation segment. Unlike the annual figures, food prices rose at a slower rate, falling to 1% from 3.5% in September.

Annual core inflation rose to 5.2% during the month, up from 4.8% the previous month, central bank figures (pdf) showed. Monthly core inflation came in at 2.1%, up from 1.7% in September. Core inflation strips out volatile items from the basket of goods such as food and fuel.

Expectations were mixed ahead of the release: Al Ahly Pharos originally forecasted the annual rate to rise to 6.8%, a prediction that it said was missed to lower-than-expected education inflation. Beltone Financial, meanwhile, wrote that the figures came in line with its estimates.

Inflation is set to increase in the medium term: “We expect headline inflation to continue gaining momentum in 4Q21e as the rise in global commodity prices starts to reflect gradually in the domestic market coupled with base effect,” Beltone’s Alia Mamdouh wrote in a note following the release. Meanwhile, Capital Economics thinks inflation could stay within the 6-6.5% range over the next months and into early 2022.

The CBE is still expected to keep rates on hold till the end of year: Inflation remains within CBE’s target range of 7% (±2%), but rising global and domestic prices indicate that the Central Bank of Egypt will maintain its cautious approach and keep interest rates on hold during its final meeting this year on 16 December, according to Beltone. This would maintain our lucrative carry trade, which could be under threat following the recent Fed taper and the subsequent US interest rate hike likely to happen next year.

Looking further ahead: Inflation could drop back toward the lower end of CBE’s target 7% (+/-2%) range in 2Q2022, Capital Economics adds in its note. This could give policymakers a chance to cut the overnight deposit rate to as low as 6.75% — from 8.25% at present — by end-2023.