Egypt’s inflation accelerated to another record high, with a new surge in food costs heaping more pressure on a country struggling with a debilitating foreign-currency crunch.
Consumer prices in urban parts of the country rose an annual 36.5% in July, up from 35.7% the previous month, according to figures released Thursday by the state-run CAPMAS statistics agency. On a monthly basis, inflation was 1.9%, compared with 2.1% in June.
Read More: Egypt Currency Squeeze Sinks Bank Foreign Buffers to New Low
The headline inflation rate’s now further beyond the level reached in the aftermath of Egypt’s 2016 currency crisis. It came in spite of a favorable base effect and was driven by a 68.4% increase in food and beverage costs, the largest single component of the inflation basket.
Inflation is now on track to stay above 30% for the rest of this year before a possibly “sharp decline” through 2024, according to Goldman Sachs Group Inc.
“The data suggest that inflationary pressures are somewhat stickier than we had previously anticipated, and that headline CPI may not peak until later in the third quarter,” Goldman economist Farouk Soussa said in a report.
Surprise Decision
The third month of acceleration helps explain a surprise decision by the North African nation’s central bank last week to hike the main interest rate by 100 basis points to 19.25%.
The regulator sees consumer price increases peaking in the second half of 2023 before “beginning a disinflation path” toward its goals. The central bank targets inflation at an average of 7%, plus or minus 2 percentage points, by the fourth quarter of 2024 and 5%, plus or minus 2 percentage points, on average by the final three months of 2026.
Egyptian inflation is bearing the brunt of three devaluations of the pound since early 2022 that helped secure a $3 billion International Monetary Fund loan.
The rate hike was unexpected because most analysts thought authorities would hold fire until they’d built up extensive foreign-currency buffers, including through a program of state-asset sales, and would only then conduct another currency adjustment.
The pound has remained stable at 30.9 per dollar in banks for months and is trading around 38 on the black market. President Abdel-Fattah El-Sisi warned in June about the impact of currency devaluations on rising prices, saying the nation of over 100 million won’t be able to tolerate much more weakening of the pound.
Goldman, which doesn’t expect the central bank to tighten policy further, said the possibility of deeper currency weakness is “the main risk” to its projections for Egyptian inflation. Domestic energy shortages pose another threat to the local currency if they drive up demand for foreign exchange by requiring additional fuel imports.
“We do not expect any depreciation of the pound in the official market,” Soussa said. “However, FX pass-through from the parallel rate remains a risk factor.”
(Updates with Goldman comments starting in fourth paragraph)
