• Consumer prices jump to 4.3% Y-o-Y in January Consumer price inflation accelerated from 2.3% Y-o-Y in December and average 2.8% in the last three years as subsidy cuts, enacted late in December, drove prices higher, data released by the General Authority for Statistics showed. Food inflation was largely stable at 1.3% Y-o-Y, while non-food inflation jumped to 5.2% Y-o-Y from 2.5% Y-o-Y in December.  
• First-round effects of fiscal measures drive inflation jump Inflation jumped 1.9% M-o-M in January, driven almost entirely by the direct impact of subsidy cuts for water, electricity and fuel. Housing and utilities category jumped 4.9% M-o-M in January, reflecting a 183% M-o-M increase in water supply, while electricity prices increased 14% M-o-M. Transport also jumped 10.3% M-o-M, reflecting higher cost of fuel prices (up 62% M-o-M). We note the large increases are coming from a very low base, with the nominal impact on the average household less significant.
• No sign of second-round effects yet January’s inflation figures are, however, showing no signs of second-round effects of the fiscal measures. Food prices, likely the most sensitive to subsidy cuts, showed 0.7% M-o-M contraction in January, with most other categories also showing monthly price contractions in January. Health care was the only exception, with 3.2% M-o-M increase, driven mostly by a 12% M-o-M increase in the hospital services sub-category. Such limited second-round effects come in line with anecdotal evidence, as well as PMI numbers, indicating companies refrained from increasing their output prices, likely awaiting guidance from the government which, in turn, is likely to postpone such moves in order to smoothen the impact of inflation on the average consumer. Meanwhile, other supportive factors – including a strong USD and falling global commodity prices – are also feeding into limited second-round effects of the fiscal measures.
• Inflationary pressures likely to remain contained in 2016 We expect the government to utilise its tools to maintain the inflationary impact of the fiscal measures limited to first-round effects. Indeed, state-owned companies are refraining from passing on the price hikes in their inputs, while other companies are not likely to receive the government’s nod in the near term, in our view, as the government tries to smooth the impact of the subsidy cuts amidst a slowing economic growth environment. Consumers are, therefore, likely to be spared major inflationary pressures though lower government spending and uncertainty are likely to weigh on consumption growth in 2016.

Mohamed Abu Basha