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Egypt Economics - July’s inflation decelerates, confirming our inflation path; limited signs of pass through from fiscal measures to overall inflation

Headline, core inflation decelerate in July

Egypt’s headline inflation decelerated in July to 13.5% Y-o-Y from 14.4% in June, confirming our view that inflation is set to return to a downward path following the one-off jump in June due to fuel subsidy cuts. The outturn was slightly above our 12.7% forecast though mostly due to higher non-food inflation. On a monthly basis, inflation also decelerated to 2.4% from 3.5% in June though it remained slightly elevated given that the numbers were loaded with regulated price adjustments. This included a 27% M-o-M increase in electricity, 9.3% M-o-M in tobacco and 7.8% in alcohol prices. As such, non-food inflation was still elevated at 2.9% M-o-M, but slowed from 5.0% in June. Meanwhile, food prices were also slightly elevated at 2.0% M-o-M thanks largely to sharp increases for fruit (4.1% M-o-M) and vegetable (8.4% M-o-M) prices, albeit they are typically volatile. 
Divergence between annual headline and core inflation is reassuring

The numbers show that both headline and core inflation are increasingly diverging, which clearly indicates that the elevated inflation seen in the past couple of months was mostly driven by the increase in government-regulated items. Note that core inflation excludes prices of both regulated items, as well as fruits and vegetables from headline numbers. Indeed, prices of regulated items were up 9.5% M-o-M in June and 5.0% in July, while fruits and vegetables were up 5.1% and 8.2%, thereby showing that they were major driving forces behind elevated headline inflation. As such, the divergence between headline and core inflation is reassuring that up until now second-round effects from the fiscal measures have not been gathering much pace. 
Maintain our view of stable rates

We still expect the Central Bank of Egypt (CBE) to keep interest rates unchanged over the next few months, including its meeting next Thursday (16 August). CBE would need at least another two inflation readings to further assess any potential second-round effects from fiscal measures implemented over the past two months. We think CBE would need to see normalising monthly inflation patterns before becoming comfortable with the inflation outlook, which we see remaining largely stable around 13%, in line with the CBE’s target. We still see limited prospects for resumption of the monetary easing cycle in the next 12 months given elevated global oil prices, which are material ahead of the upcoming fuel price liberalisation next summer, as well as elevated global market risks amidst global monetary tightening. Further normalisation in oil prices though could act as a positive surprise, providing room for limited easing by the end of the year, especially if the government moves ahead with hedging oil prices, in our view.

Mohamed Abu Basha