Inflation was one of the top newsmakers of year, and rightly so. When it comes to cost of living, particularly amid a global economic crisis, what issue can be more pressing?
Indeed, 2008 will probably be remembered as the year of soaring inflation, jumping from an annualized 6.9 percent in December 2007 to a whopping 20.9 percent in November 2008.
Skyrocketing food and gasoline costs shot inflation rates to a peak of 23.6 percent in the year to August, a 16-year-high which strained wallets and fueled public dismay.
“Inflation rates rose very quickly [in the first half of 2008] mainly driven by leaps in food prices. Food price inflation stood at 3.5 percent in January and then [escalated] to 27 percent in May, said Simon Kitchen, senior economist at investment bank EFG-Hermes.
“Inflation later became an issue when fuel prices rose in May. Fuel price inflation (transport) soared from 5 percent in January to 20 percent in May, he added.
Attempting to strike a balance, the Central Bank of Egypt (CBE) nudged overnight rates up six times this year by a cumulative 275 basis points.
At the end of the year, the dust seemed to be settling as inflation dropped to 20.9 percent in the year to November, mainly triggered by a global recession.
The year opened with consumer prices rising 10.5 percent year-on-year in January, the fastest annual pace since April 2007. Consumer price index (CPI) for food and beverages throughout Egypt rose 16.2 percent in the year to January due to an increase of 34.9 percent in the price of bread and 26.4 percent in the price of food oils.
In a bid to tame inflation, the CBE raised in February its key overnight interest rates by 25 basis points – the first change in over a year – citing higher food prices and inflationary pressure from surging economic growth. At that time, the CBE paid 9 percent on overnight deposits and lent overnight at 11 percent.
Egypt’s urban consumer inflation soared to its highest rate in over three years in March as food prices jumped, adding to the pressure on the central bank to raise interest rates for the third time.
Urban CPI rose 14.4 percent in the year to March after a 12.1 percent increase in February. Food prices – the most sensitive part of the basket of goods in the most populous Arab country – rose 20.5 percent in urban areas in the year to March.
Bread and grain prices rose 48.1 percent, fruit and vegetable prices climbed by over 20 percent, and edible oils were 45.2 percent more expensive than a year ago.
“We have imported inflation in Egypt. A lot of our commodities such as foodstuffs, steel, and cement, are imported. Prices of these products were on the rise worldwide, so domestic prices went up, said Elwy Taymour, managing partner at Pharos Holding for Financial Investments.
Public discontent rose in April as inflation continued to erode living standards of middle classes and make the poor hungrier, in a country where more than 14 million people live on less than $1 a day
For decades, Egypt has provided cheap bread to its working poor to help them survive and to ward off discontent. This year queues for subsidized bread lengthened, tempers flared and 11 Egyptians died in lines in early February, two of whom were stabbed during a fight, while the others expired from extreme exhaustion.
Prime Minister Ahmed Nazif told Reuters in March that people who were once willing to pay extra for free-market bread could no longer afford it, adding to demand for subsidized loaves.
Rising global food prices stressed budgets of already poor Egyptians as food takes a bigger chunk of family budgets. Subsidized bread became one of the last affordable sources of food. The rising demand for subsidized bread, coupled with a jump in the price of wheat, led to a severe shortage of Egypt’s staple food. Several bakers were caught selling subsidized wheat on the black market instead of using it to bake the bread.
In order to keep prices of bread affordable, the government spent an extra LE4.8 billion on wheat. At the time of the crisis, a ton of wheat imported from the United States cost $430 (LE 2,300) up from $180 (LE 990) just two years ago. President Hosni Mubarak ordered the Egyptian army to bake and sell subsidized bread to the public from the army’s own bakeries.
On April 6, a general strike was organized to protest higher food prices, lack of subsidized bread, and to show solidarity with a textile workers’ strike in the Nile Delta town of Mahalla El Kubra. Thousands participated, hundreds were arrested and three people were killed.
Responding to growing social unrest, Mubarak proposed at the end of April a salary increase of about 30 percent for public sector employees, however, the move itself weighed on inflation rate, as the government imposed a few days later steep increases in fuel prices – among other commodities – to cover costs of the pay hikes.
The government raised overnight fuel prices between 35 and 57 percent in the first week of May, offsetting some of the effects of the wage increase. As a result, inflation surged 19.7 percent in the year to May.
Spending by the average Egyptian family rose in June by 50 percent since the start of the year, according to the UN World Food Program.
Global oil prices soared to $148 per barrel in July, casting further rises on costs of foodstuffs worldwide, particularly for wheat, of which Egypt is a major importer. Egyptian Finance Minister Youssef Boutros-Ghali said 80 percent of inflation stemmed from higher prices for imported goods or for goods of which the government controls the prices.
By press time on Monday, oil fell below $43 a barrel after touching $34 earlier in the month, its lowest level in four and a half years. Oil is now $105 off its July peak, as the global economic slowdown overshadowed OPEC’s record supply cuts.
Rising food prices drove inflation in urban parts of Egypt to its peak at 23.6 percent in the year to August – a rate above market forecasts – piling pressure on the central bank to raise interest rates for the sixth time this year to 11.5 percent for deposits and 13.5 percent for lending.
With global economic growth teetering towards recession, domestic inflation fell for the first time to 22.2 percent in the year to September. At that time, Ghali stated the country had gone through the worst phase of inflation, and lower global food prices would bring inflation rate down.
“Look at international commodity prices. Wheat used to be $480 [a ton] and it is now at $250. Corn is the same. Soybean is the same. Edible oils the same. All of this is bound to translate here, he said.
International food prices hit nine-month lows in September and have since tumbled further, as investors pulled their money out of turbulent markets. As global price pressures began to subside, inflation fell for a second straight month to 21.2 percent in the year to October.
Still, a decline in global food prices was taking time to filter through to Egyptian consumers. In October, food prices were 26.7 percent higher than they were a year ago.
Seeking more price stability, the central bank kept its main interest rates unchanged on Nov. 6 despite some expectations that it would cut them to stimulate economic growth hit by the world’s worst financial crisis in 80 years.
Inflation rate dipped a fraction to 20.9 percent in the year to November, for the third month in a row, cementing forecasts of an imminent cut in interest rates.
“Inflation was a big concern in early 2008, but now it has become a secondary concern.. The danger has passed, Kitchen pointed out. “The main concern now is growth and not just in Egypt but also worldwide.
He expected the central bank to cut overnight rates by 300-400 basis points over the next 12 months to bolster Egypt’s economy against the global crisis. “Inflation risks are passing, and the Egyptian authorities are now more concerned about growth.
Egyptian gross domestic product growth is expected to ease to an average of 5.25 percent in the current 2008/09 fiscal year from a record high 7.2 percent the previous y
ear, according to a recent Reuters poll.
Analysts expect inflation to end the year 2008 just below 20 percent in light of falling global commodities prices coupled with an economic slowdown. “It’s imported inflation again. When global prices fall down, domestic prices follow suit, Taymour added.
Kitchen expects inflation to cool off to an average of 16 percent in fiscal year 2008/09, estimating it could reach as low as 7 percent by mid-year.
Government officials said it could slip to 10-12 percent.