Egypt: CPI inflation quickens to 26.2% y/y in August following transport price hike

• Market expected inflation to slow in August on back of favourable base effects, stable FX rate
• Egypt hiked electricity prices in September
• Transport price hike to lead to first- and second-round effects, inflationary outlook remains challenging
• MPC will have to maintain tight monetary stance over Q4

Urban CPI inflation accelerated for the first time in seven months in August, quickening to 26.2% y/y from 25.7% y/y in July, according to figures published by Capmas. What is more, urban inflation came significantly above market expectations, as various polls showed the market expects further moderation in inflation on the back of favourable base effects and a stable FX rate. Further, the currency reform from early March has eased the FX shortages and reduced the material and input shortages that drag on the supply of goods. Nevertheless, urban consumer inflation accelerated because of the?fuel price hike?and higher prices of medicines, which could be traced to the problems in the local manufacturing of pharmaceuticals due to recurrent input shortages. First- and second-round effects from the fuel price adjustment as well as supply line disruptions in the region suggest the inflationary outlook will remain challenging over Q4. Further, we note Egypt hiked electricity tariffs in early September, after postponing the adjustment for three months.

In m/m terms, the overall price index rose by a strong 2.0% following a slight 0.4% m/m increase in July, on the back of the fuel price hike, rising prices of vegetables and fruits, as well as rising medicine prices. Food inflation remains the main driver of inflation, because of its large weight in the basket of 33% and hides political and social risks as many households rely on subsidized bread (whose price was also hiked recently). The government hiked social spending to ease social discontent, but risks have been growing in recent years. The hotels and restaurants category also recorded strong m/m growth, reflecting the strong recovery of the tourism sector that began last year.

Breakdown

Food remains the main driver of annual consumer inflation (+11.8pps to the headline print), although we have observed very strong contribution from Hotels and restaurants (+2.1pps) recently and Medical care costs, which added 2.1pps to the headline index, after rising by 26.5% y/y in the month. In fact, medical care costs have recently become as an important contributor to urban inflation as traditional categories, such as transport and utility and housing, which together with food have a combined weight of nearly two-thirds in the CPI basket. Core inflation, which strips volatile items, was expected to ease on the back of a high base, but we believe core inflation actually picked up in the month.

Outlook

Overall, urban annual inflation remains broad-based, reflecting FX pass-through, surging food prices, supply line disruptions, robust monetary expansion, and fuel and energy price adjustments. The MPC had set ambitious inflation targets of 7% +/-2pps on average by Q4 2024 and 5% +/-2pps by Q4 2026. While we don't think these are feasible, we think they show CBE's commitment to tighter monetary stance over the medium term. While we expect that inflation will moderate in 2024 on the back of favourable base effects, it will remain elevated, nonetheless. The MPC has delivered a massive 19pps interest rate increase and 400bps increase in the required reserve ratio since March 2022, and we think the MPC will maintain its current tight stance over Q4.