Base effect may lead inflation rate to moderate in coming few months

Noha Abd ElRahman
3 Min Read
Annual core inflation reached 12.3% in June, up from 12.23% in May

Amr Al-Alfy, head of the research sector at Mubasher International for Securities, expected that Egypt’s inflation rate will start to moderate in the coming few months because of the base effect in December 2017.

However, Al-Alfy assured that there could be more headwinds pushing the rate higher again, or at least sustaining it around 25%, with the continued subsidy restructuring process.

“For example, another round of fuel subsidy cuts—expected by June 2018—would keep prices for the second half of 2018 elevated, albeit with a lower year-over-year (y-o-y) inflation rate,” he stated.

However, Al-Alfy noted that what is more important is that the Egyptian economy is moving towards becoming more market-driven, as opposed to being policy driven.

“This is a good thing for the future of Egypt’s economy,” he added.

According to a report released by the research sector at Mubasher International for Securities, November’s inflation data released by Central Agency for Public Mobilisation and Statistics (CAPMAS) which shows annual urban inflation rate dropped significantly to 26% from 30.8% in October, while the urban and rural rate recorded 26.7% versus 31.8%.

“The base effect worked its magic with the 5% drop attributed to comparing two data points y-o-y post-flotation for the first time, which means that the 30s% phase is history,” the report highlighted.

“Inflation rate could have been lower, but several factors repressed the full favourable base effect, including the hike in tobacco prices on 23 November, clothing and footwear up 25%, contribution to the total inflation rose from 0.98% in October to 1.11% in November, in addition to education which is still going through its seasonal effect, contributing 0.81% to the 26.7% total rate,” the report illustrated.
On the bright side, the released report affirmed that contribution of food and beverages eased from a quarter-average of 22% to around 17%, driving the bulk of the recorded drop.

“In general, monthly inflation accelerated again from 0.9% in October to 1% in November, most of which was attributed to the aforementioned items, constituting together around 1.1% of the monthly change, which more than offset the monthly decrease in food and beverages of 0.6%,” the report said.

In this regard, Esraa Ahmed, economic analyst at Mubasher International for Securities said that the favourable base effect should be clearer in the upcoming couple of months, expecting the inflation rate in December to hover around early 20s%.

“More importantly, lower inflation rates will likely encourage the Central Bank of Egypt (CBE) to make the long-awaited decision to lower interest rates, most probably by 1% in their next meeting scheduled for 28 December 2017,” she expected.

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