11-Nov-2018
Egypt Economics - Headline inflation accelerates further in October, but underlying inflation remains benign; sticking to our call of stable policy rates
Fruit & education drive another elevated inflation reading…
Egypt’s headline urban inflation continued to accelerate for the third consecutive month, reaching 17.7% Y-o-Y in October vs. 16.0% in September, according to data released by CAPMAS. The acceleration is, once again, driven by volatile fruit prices, in addition to seasonal factors, namely rising education prices; the latter typically changes once every year in October, which marks the beginning of the school season. On a monthly basis, inflation remained elevated, at 2.6% in October, compared to 2.5% in September and is driven primarily by a 3.5% M-o-M increase in food prices. For the fourth consecutive month, the bulk of food price increase is driven by volatile fruits prices, with the latter rising 13.3% M-o-M in October; thereby, raising the cumulative price increases since June to a staggering 51.5% (Fig. 4). Meanwhile, vegetable prices dropped 10.4% M-o-M, which is a positive sign of normalisation, following cumulative increases of 24% in the preceding four months. Monthly food inflation, excluding fruit and vegetables, stood at a benign 0.2% in October (Fig. 5). Meanwhile, non-food inflation was up 1.7% M-o-M, compared to 0.2% in September, driven predominantly by a 14.6% M-o-M increase in education prices (seasonal as mentioned earlier); excluding education, monthly non-food inflation is only 0.2%.
…with a still benign underlying inflation position
The elevated headline inflation readings over the past few months, including October’s, come against a largely benign underlying inflation position. This benign position has been best reflected in the divergence between headline and core inflation over the past few months (Fig. 10), where core – which excludes fruit and vegetables, as well as regulated items – saw a notable slowdown, reaching high single-digits for the first time in more than two years. We expect October’s core inflation, yet to be released by the Central Bank of Egypt (CBE), to remain largely flat at 8.6% Y-o-Y. With such relatively comfortable underlying inflation position, we do not see the elevated headline readings raising major concerns with regard to an acceleration in overall inflation trends.
Sticking to our rates call of ‘hold’
We expect the Monetary Policy Committee (MPC) at CBE to leave policy rates unchanged at its meeting on Thursday, despite the elevated inflation readings over the past two months. While we acknowledge it remains a tricky situation for the CBE, as headline inflation is now well above its announced target of 13% +/-3%, the fact that underlying inflation remains benign provides, in our view, credible reasons to maintain policy rates on hold and not react to supply shocks. This is especially the case since we see signs of normalisation in the supply shock, as noted in vegetable prices this month, leading to expectation of normalisation in overall headline inflation over the coming few months.
A note on fruit and vegetable prices
We note that such heightened volatility in fruit and vegetable prices is not uncustomary for Egypt’s inflation dynamics; in fact, the country has previously seen sharper price increases than those currently experienced (check historical series in Fig. 8). While these two items are typically volatile in nature, due to weather conditions and diseases, in the case of Egypt they do clearly demonstrate market inefficiencies in the agriculture sector (at the level of productivity, logistics or transportation), as well as weak competition. This is a key driver for food prices remaining in double-digits for nearly two decades now. In this latest volatility episode, drivers of rising prices include a combination of a weak harvest and disruption in availability of seeds and rising exports. With fruit and vegetables constituting c8% of the overall basket, such sharp price increases feed notably into the headline inflation number.
Mohamed Abu Basha
Egypt’s headline urban inflation continued to accelerate for the third consecutive month, reaching 17.7% Y-o-Y in October vs. 16.0% in September, according to data released by CAPMAS. The acceleration is, once again, driven by volatile fruit prices, in addition to seasonal factors, namely rising education prices; the latter typically changes once every year in October, which marks the beginning of the school season. On a monthly basis, inflation remained elevated, at 2.6% in October, compared to 2.5% in September and is driven primarily by a 3.5% M-o-M increase in food prices. For the fourth consecutive month, the bulk of food price increase is driven by volatile fruits prices, with the latter rising 13.3% M-o-M in October; thereby, raising the cumulative price increases since June to a staggering 51.5% (Fig. 4). Meanwhile, vegetable prices dropped 10.4% M-o-M, which is a positive sign of normalisation, following cumulative increases of 24% in the preceding four months. Monthly food inflation, excluding fruit and vegetables, stood at a benign 0.2% in October (Fig. 5). Meanwhile, non-food inflation was up 1.7% M-o-M, compared to 0.2% in September, driven predominantly by a 14.6% M-o-M increase in education prices (seasonal as mentioned earlier); excluding education, monthly non-food inflation is only 0.2%.
…with a still benign underlying inflation position
The elevated headline inflation readings over the past few months, including October’s, come against a largely benign underlying inflation position. This benign position has been best reflected in the divergence between headline and core inflation over the past few months (Fig. 10), where core – which excludes fruit and vegetables, as well as regulated items – saw a notable slowdown, reaching high single-digits for the first time in more than two years. We expect October’s core inflation, yet to be released by the Central Bank of Egypt (CBE), to remain largely flat at 8.6% Y-o-Y. With such relatively comfortable underlying inflation position, we do not see the elevated headline readings raising major concerns with regard to an acceleration in overall inflation trends.
Sticking to our rates call of ‘hold’
We expect the Monetary Policy Committee (MPC) at CBE to leave policy rates unchanged at its meeting on Thursday, despite the elevated inflation readings over the past two months. While we acknowledge it remains a tricky situation for the CBE, as headline inflation is now well above its announced target of 13% +/-3%, the fact that underlying inflation remains benign provides, in our view, credible reasons to maintain policy rates on hold and not react to supply shocks. This is especially the case since we see signs of normalisation in the supply shock, as noted in vegetable prices this month, leading to expectation of normalisation in overall headline inflation over the coming few months.
A note on fruit and vegetable prices
We note that such heightened volatility in fruit and vegetable prices is not uncustomary for Egypt’s inflation dynamics; in fact, the country has previously seen sharper price increases than those currently experienced (check historical series in Fig. 8). While these two items are typically volatile in nature, due to weather conditions and diseases, in the case of Egypt they do clearly demonstrate market inefficiencies in the agriculture sector (at the level of productivity, logistics or transportation), as well as weak competition. This is a key driver for food prices remaining in double-digits for nearly two decades now. In this latest volatility episode, drivers of rising prices include a combination of a weak harvest and disruption in availability of seeds and rising exports. With fruit and vegetables constituting c8% of the overall basket, such sharp price increases feed notably into the headline inflation number.
Mohamed Abu Basha