Cairo – Mubasher: Egypt's inflation dipped to 14.1% year-on-year in September, but this is unlikely to mark the start of a downward trend, said a recent report published by capital economics.
Policymakers are edging to closer to an IMF deal, so afresh devaluation of the pound and further subsidy cuts are looking increasingly likely, which will cause inflation to rise again.
Earlier data showed that Egypt’s headline rate of inflation – which only covers urban consumers – fell back from an eight-year high of 15.5% year-on-year in August to 14.1% y/y in September.
The fall in the headline rate was due to a sharp drop in food inflation. Food prices (which account for 40% of the CPI basket) rose by 14.8% year-on-year last month, compared with 19.3% year-on-year in August.
Stripping out food inflation, however, underlying price pressures have continued to build.
Capital economics' estimate of non-food inflation increased to 13.6% year-on-year, its highest rate since early 2009.
Housing and utilities inflation eased from 7.9% year-on-year to 6.4% year-on-year. However, transport and miscellaneous goods inflation rose further. Alcohol and tobacco inflation jumped from 3.0% year-on-year to 17.9% year-on-year.
Despite September’s dip, capital economics expects inflation to rise again soon especially after all the authorities are edging closer to securing a financing agreement with the IMF where one of the key lending conditions will be a shift to a more flexible exchange rate.
Capital economics expects the pound to weaken by around 25% against the US dollar by end-2017, which will push up imported goods inflation.
Moreover, the Fund is likely to insist that the government implements fresh subsidy cuts. Based on the cuts implemented in mid-2014, this could add an additional 2%-pts to headline inflation.
