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Sunday, 11 September 2022

Inflation hits highest level since November 2018

Inflation accelerated in August to reach a near-four-year high on the back of higher food and beverage prices, according to figures from state statistics agency Capmas (pdf) on Thursday. Urban consumer prices grew at a 14.6% y-o-y clip, compared with 13.6% in July, marking the highest recorded figure since November 2018 as the cost of living continued to rise on the back of the war in Ukraine and the weakening EGP.

Food and beverages were once again the culprits: Food and beverage prices — the biggest component of the basket used to measure inflation — rose 23.1% y-o-y in August, up from 22.4% the month prior. Transportation costs also rose 17.9% y-o-y, while housing, electricity, water, and fuel costs rose 5.6% y-o-y.

But monthly inflation slowed: Urban inflation rose 0.9% m-o-m in August — a slower pace from July when it rose 1.3%.

Core inflation continued to climb: Core inflation — which strips out volatile items such as food and fuel — climbed 16.7% from a year earlier, up from 15.6% in July, according to central bank data (pdf).

Some analysts saw this coming: “August figures came in close to our expectations of 14.7% y-o-y and 1.0% m-o-m,” CI Capital Senior Economist Sara Saada told Enterprise.

We probably haven’t peaked just yet: Inflation is “likely to rise a little further” through the end of the year and “to peak at around 17%,” Capital Economics MENA economist James Swanston wrote in a note on Thursday. Swanston expects the EGP to depreciate further in the months ahead, which will fuel inflation, he notes. Saada predicts headline inflation will “accelerate to 18% in 4Q 2022 given the current FX directional trend.”

Analysts and economists widely expect the EGP to weaken further against the USD in the coming weeks and months as the government tries to seal an agreement with the IMF for an emergency loan. The Fund is likely to want to see increased exchange rate flexibility before signing off on a new program. The currency has fallen 22.7% against the greenback since March.

There are signs that inflation could be slowing for producers: PMI data out last week showed that input prices faced by the non-oil private sector slowed in August, though raw material and fuel prices continued to rise.

What this means for interest rates: A more flexible EGP could see the central bank resume its tightening cycle when it meets later this month. “If 2016’s sharp currency movement which filtered through inflation is any indication for the future, we expect to see the central bank either front-loading or slow-pacing a hike in interest rates by 300 bps through the end of the year,” Saada said.

Capital Economics expects less by way of interest rate hikes, penciling in a total increase of 150 bps until the end of 2022, which would bring the overnight deposit rate to 12.75%.

The CBE has hiked interest rates by 300 bps since March to tame inflation and curb outflows but kept rates unchanged in its previous two meetings, with the justification that deviations from its target of 7% (±2) are “transitory.”

Also taking note of the story: Bloomberg.

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