Food price shocks drive Egypt’s inflation to highest in five years

Egypt’s annual headline inflation hit a five year peak in May at 13.11 percent compared to 10.96 percent in April on the back of food price hikes, analysts say.

Inflation accelerated in Egypt as the government first slashed energy subsidies in July of last year, raising prices at the pump by up to 78 percent.

“Most of the rise in inflation is driven from the increase in the prices of vegetables and fruits which are by nature volatile, as such it is not reflective of aggregate demand side pressures,” Hany Farahat, Senior Economist at Cairo based CI Capital, told Ahram Online.

Farahat explained that the price shocks in fruits and vegetables seen in the last few weeks were partly driven by “deficiency in price regulation and monitoring from the government side.”

Food prices have seen several supply side shocks in that period as media reported increasing supply to Libya and bad weather, Hany Genena, Chief Economist at Cairo-based Pharos Holding told Ahram Online.

However, Egypt’s annual core inflation, which excludes volatile items to look at long-term inflationary pattern, accelerated to 8.14 percent from 7.19 percent in April, the country’s central bank (CBE) announced on Wednesday.

Core inflation shows a more objective view, reaching two year lows between January and April of 2015. The rise of core inflation in May would only be worrying if it becomes a pattern in the coming months, Farahat said.

Interest rates

Economists expect the central bank to either hold interest rates or cut them during the monetary policy committee (MPC) regular meeting on Thursday.

Egypt’s central bank has traditionally targeted curbing inflation via maintaining high interest rates.

However, Genena believes the high interest rates set by the MPC are not reflected on deposit rates making the decision ineffective.

The private sector, which suffers from energy shortages, and the government both end up with higher financing costs, he said.

“We support a policy rate cut because growth is fading, and a shift in liquidity to private sector lending needs the benefit from a lower cost of funding,” Farahat said.

Egypt’s average economic growth is projected to be 3 percent in the second half of the 2014/2015 fiscal year, compared with 5.6 percent in the first half of the year, Planning Minister, Ashraf Al-Arabi, was quoted by Reuters in May.

Jason Tuvey, economist at Capital Economics, however, remarked that the high inflation rate in May lowers the chances that the CBE will cut interest rates, despite expectations for inflation to fall back in the coming months.

Egypt’s deposit and lending interest rates currently stand at 8.75 and 9.75 percent respectively.

source:Ahram online