Egypt’s annual headline inflation rate came in at 29.8 per cent in January, dropping from 33.7 per cent in December 2023, according to data from the Central Agency for Public Mobilisation and Statistics (CAPMAS). 

The drop came despite the price rises of many goods and services since the beginning of the year, including train fares, telecommunications services, and electricity bills.

The Central Bank of Egypt (CBE) also reported a drop in core inflation. In a statement last Thursday, it said that core inflation had registered 29 per cent for January, down from 34.2 per cent the month before. 

Core inflation measures the rate of change in prices without including the prices of highly volatile commodities such as food and fuel. 

“It’s the base year. There’s no other reason,” said Mohamed Hassan, managing director of the financial consultancy and investment management firm Alpha FMC. 

According to CAPMAS, monthly headline urban inflation recorded 1.6 per cent in January compared to 4.7 per cent in the same month the previous year and 1.4 per cent in December 2023.

Hassan said that most of the prices of basic goods in Egypt have climbed significantly in recent weeks in tandem with the rise in dollar prices on the black market. A lot depends on the foreign components in the product or whether it is imported, he added. 

Some traders have begun to charge in dollars or euros for the commodities needed for local production. It is the only way they can obtain the hard currency they need to import the commodities, according to recent press reports in connection with corn feed.

Basic food prices have also soared in recent days. A carton of 30 eggs has jumped to LE180, up around 29 per cent from the previous week. A litre of cooking oil has risen from LE70 to LE110. A can of fava beans now costs LE25 instead of LE13. A 10-loaf bag of unsubsidised bread rose from LE20 to LE25 in the past week, the second increase in less than three months. 

Hani Geneina, chief economist and equity strategist at Cairo Financial Holding, agrees that the fact that this is a base year is one reason why inflation has been tapering off. As inflation was high, its use as a gauge would tend to show a decline, he noted. 

But another reason is the fact that the prices of some basic commodities, such as sugar, eggs, and poultry, were fixed in January, before the big price hikes in basic foodstuffs hit in February, he said.

Inflation in January came in at below 34 per cent, as forecast by UK-based economic consultancy Capital Economics. It also came in at below the average market forecast of 32.9 per cent. 

Capital Economics predicts that price pressures will remain relatively strong despite the easing of inflation for the fourth month running. It expects inflation to remain above the CBE’s target range of five to nine per cent until mid-2025. 

The problem is being aggravated by delays in supply chains due to the ongoing disruption of shipping in the Red Sea, Capital Economics said.

It noted that the imminent devaluation of the Egyptian pound means that inflation will remain high for a while. A devaluation of the pound is expected to accompany a deal with the International Monetary Fund (IMF) for a loan of between $6 and $12 billion to help Egypt through its current hard-currency crunch.

Capital Economics predicts that the exchange rate could climb as high as LE65 to the dollar. It also expects a further tightening of monetary policy and for the CBE to raise interest rates by at least 300 basis points. 

The CBE raised interest rates by 200 basis points earlier this month, bringing the total hikes applied to key interest rates to 13 per cent (1300 bps) since March 2022.

Hassan does not expect the pace of price hikes to slow down any time soon, especially with the holy month of Ramadan only a month away. Increased consumption in Ramadan is always a reason for additional hikes in food prices, he explained. 

Moreover, the anticipated devaluation of the Egyptian pound will trigger another rise in the prices of petrol and other petroleum products, which will be felt in the costs of other goods, he added. 

* A version of this article appears in print in the 15 February, 2024 edition of Al-Ahram Weekly