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Wednesday, 11 January 2023

Inflation hits new high on weaker EGP

Inflation rose to a fresh five-year high in December as the impact of successive currency devaluations continued to feed through to the economy. Figures released yesterday by state statistics agency Capmas showed annual urban inflation jumped to 21.3% in December, up from 18.7% the month before, driven by surging food costs. This is the highest rate since December 2017, and is up from just 5.9% in December 2021.

This was above analysts’ forecasts: The median forecast in a poll of economists conducted by Reuters had inflation rising to 20.5% during the month.

Food prices continue to soar: The rise in the headline rate was fuelled by a 37.2% y-o-y rise in food and beverage costs, which make up the largest component of the basket of goods used to measure inflation.

Core inflation hit another five-year high as price pressures intensified across the broader economy: Core inflation, which strips out volatile items such as food and fuel, rose to 24.4% y-o-y in December from 21.5% a month earlier, according to Central Bank of Egypt figures (pdf) — its highest since November 2017. This is the 16th month in a row that core inflation has accelerated. The hospitality sector was hit particularly hard, with prices rising 33.2% y-o-y. Clothing and footwear prices were up 16.5% y-o-y while healthcare costs rose 12.3%.

Some respite for monthly inflation: Monthly inflation dipped to 2.1% in December, down from 2.3% in November.

The upsurge was driven by a trifecta of headwinds: Successive currency devaluations, the fallout from the war in Ukraine, and import restrictions all played a part. The Central Bank of Egypt has allowed the EGP to devalue three times in less than a year as part of its agreement with the IMF to move towards a permanently flexible exchange rate. The EGP has fallen 75.6% against the greenback since the first devaluation in March, and is down 11.7% since last week when the central bank allowed the currency to depreciate further.

A long way from target: The central bank is currently targeting an inflation rate of 7% (± 2%) by 4Q 2024.

Analysts expect prices to continue to accelerate in the months ahead: In a note yesterday, CI Capital forecast inflation to peak at 22-24% during 1Q 2023 due to the ongoing depreciation of the EGP, while BNP Paribas is expecting it to rise to 25% by March. Jason Tuvey, an analyst at London-based Capital Economics, shares a similar outlook, telling the Associated Press that consumer price growth will continue to rise in the coming months.

A fresh round of interest rate hikes to follow? Rising inflation may push the CBE to further raise interest rates when it next meets on 2 February. The central bank hiked rates by 800 bps last year, including a huge 300-bps increase at its last meeting in December.

The story got ink from the international press: Reuters, Bloomberg, and the Associated Press all covered the December inflation data.

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