Saturday,29 July, 2017
Current issue | Issue 1345, (18 - 24 May 2017)
Saturday,29 July, 2017
Issue 1345, (18 - 24 May 2017)

Ahram Weekly

Inflation slows

Contrary to what many people may feel, the pace of inflation is slowing for the third month in a row, reports Sherine Abdel-Razek

Food prices have spiked ahead of the holy month of Ramadan                                        photo: Bloomberg
Food prices have spiked ahead of the holy month of Ramadan photo: Bloomberg

“I don’t understand the official inflation figures. I only know that my household expenses are increasing by the day. LE100 now feels like LE20 a year ago,” said one housewife in the Heliopolis area commenting on news that Egypt’s monthly inflation was slowing down.
 
Month-on-month inflation, the rate at which the prices of selected commodities and services increase, rose 1.7 per cent in April from a month earlier, the slowest pace since October. The rate was 4.8 per cent in November, the month the government signed a $12 billion agreement with the International Monetary Fund (IMF) under which it has floated the pound, cut fuel subsidies and increased interest rates.
 
The resulting inflationary pressures have made many Egyptians, 40 per cent of whom live on the poverty line, suffer to make ends meet. “We took off all the luxury items from our shopping lists. I am not talking about expensive meat or chicken. Even fruit and vegetables have become unaffordable,” the housewife said.
“My husband’s salary hardly lasts until the end of the month.”  
 
Nashwa Ahmed, a 40-year-old accountant in a private company said she never thought the devaluation would push prices up to the present extent. “Food, petrol, electrical appliances and clothes — everything has become much more expensive,” she said, explaining that after a week roaming shops in search of reasonably-priced summer clothes she had decided to use a freelance tailor for cheaper outfits, something she has not thought of doing for at least 20 years.

However, as this is the third month in a row that the monthly inflation rate has been easing down, analysts believe that inflation is peaking and will soon subside.

“Examining the recent trend of different price indicators, the inflationary shock that followed the implementation of economic reform measures, mainly the exchange rate liberalisation and the fuel price hike in November, seems to be cooling off,” read a note by Pharos Holding, a financial consultancy.

Measuring the prices of products at the factory gates, the country’s Producer Price Index (excluding mining and quarrying activity) has also decelerated from 6.9 per cent in November to 1.9 per cent in April.

According to the investment bank EFG-Hermes, non-food inflation has been nearly stagnant month-on-month, up by only 0.1 per cent, as inflation has been driven mainly by food prices which have increased at a monthly rate of 3.2 per cent.

But contrary to the monthly gauge, annual inflation accelerated to 31.5 per cent from 30.9 per cent in March. This is its highest annual rate since June 1986 when it reached 35.1 per cent, according to Reuters.

Food prices have spiked, rising by 43.6 per cent year-on-year in April ahead of the holy month of Ramadan when increased demand for food pushes prices up.
 
Such increases in prices have made the government’s job harder in reforming the economy. According to the 2017/2018 budget, more austerity measures, including a 20 to 25 per cent hike in fuel prices, are on the way.
 
EFG-Hermes recently upped its inflation forecast for the 2017/2018 fiscal year to 16.5 per cent from 13.9 earlier.

Pharos Holding’s Rami Orabi said in a research note that three factors could drive inflation higher in the near term: electricity tariff hikes; the scheduled increase in the value-added tax (VAT) rate by one per cent to reach 14 per cent; and another round of fuel price hikes.
 
The government is doing its best to help, and last week it said it would increase the allocations for each ration card of subsidised food items by LE14 to reach LE35 during Ramadan. This decision will cost the state LE1 billion.

The IMF has recently said that it is working with the government to rein in inflation, suggesting raising interest rates. However, some experts disagree for fear of the negative effect such a step could have on credit. Borrowing activity by companies has declined since the Central Bank of Egypt’s (CBE) decision to increase its benchmark rates by three per cent in November. Its monetary policy committee is due to meet on 21 May to discuss interest rates.

Orabi noted that “the timing of the next round of the fuel price hike would be crucial in deciding the interest rate reaction. If the government can manage to undertake the next fuel price hike after November, by then the inflation rate will be on a notable downward trend.”

“Taking advantage of the favourable base effect, a decelerating annual inflation rate would keep inflation expectations anchored without an interest rate hike, despite the fuel price hike,” he said.

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