Inflation
in Egypt increases to 10.6% and is set to rise further as the full impact of
the cut in subsidies is realised.
July inflation
data for Egypt were published yesterday. These are the first figures on inflation
following the government’s decision to reduce
its energy subsidies early last month. The headline figure showed annual
inflation accelerating from 8.2% in June to 10.6% in July. Monthly inflation—where
the effect of subsidy reduction is more pronounced compared to the annual number—was
3.1%, the highest increase since January 2008. Looking at the drivers of this
figure, three things stand out.
First, the direct
impact of subsidy reduction on prices has been lower than expected. For
example, the “housing, water, electricity, gas and fuel” component of inflation
rose by only 3.0% in July, despite double-digit price hikes for several energy
products. Similarly, the “tobacco and related products” item rose by 14.1%,
less than expected given the government’s recent decision to increases
taxes on cigarettes and alcohol. (See this
for a list of cigarette prices before and after the tax increase.) If the inflation
figure for July has not fully captured the effect of energy subsidy reduction
and tobacco tax hike, then we should expect further increases in the prices of these
two components next month.
Second, the
second round effects of the tax/price hikes are yet to be fully realised. For
instance, “transport” costs rose by 11.2% in one month from June to July
reflecting the rise in fuel prices, while prices at “hotels, cafes and
restaurants” rose by 4.4%. Prices of these two components might rise further after
the full incorporation of higher energy prices, implying additional contribution
towards inflation from these two categories in the future.
Third, food price
inflation in Egypt accelerated to 2.7% despite recent declines in international
food prices. This rise could be only temporary due to the effect of Ramadan,
and we might see a moderation in this component going forward.
In this sense, Egypt
has been quite fortunate that the reduction of subsidies coincided with falling
international food prices. Things could have been a lot worse if energy price
increases were coupled with food price inflation similar to the one witnessed
in mid-2008 or 2010, especially with food accounting for 40% of the consumer
price index basket.
Overall, annual inflation
will probably increase further as the direct and indirect effects of energy and
tobacco price increases get fully incorporated, notwithstanding lower food
price inflation. This is unlikely to spur the Monetary Policy Committee (MPC)
of the Central Bank of Egypt into further action in its next meeting. Instead,
the MPC may choose to wait and see if its pre-emptive interest rate
hike last month would prove sufficient to curb inflation.
