Inflation returns to near record highs after April’s brief respite: Annual urban inflation rose to 32.7% y-o-y in May from 30.6% the month before, according to figures released on Saturday by state statistics agency Capmas. The May reading marks a return to the near record high inflation recorded in March before price hikes briefly cooled in April. Inflation is now once again at its highest since July 2017, when it hit an all-time high of nearly 33%.

Analysts expected inflation to rise — but not so steeply: The median forecast in a Reuters poll of 13 analysts was for inflation to rise to 31.4%. Economists were expecting prices to have risen last month thanks in part to the government’s recent decisions to hike the prices of dieseland subsidized commodities sold to ration card holders.April’s breather came on the back of a favorable base effect, the stabilization of the USD-EGP exchange rate, and a slight slowdown in food price growth.

Food inflation came in hot: Food and beverage prices — the largest component of the basket of goods and services used to calculate inflation — accelerated to 60.0% y-o-y in May from 54.7% the month before, approaching the territory of the all-time high of 62.9% recorded in March. The Central Bank of Egypt (CBE) has not yet released last month’s figures on core inflation, which is often seen as a superior measure of price growth because it strips out volatile items such as food and fuel.

Monthly inflation also rose to 2.7% in May — up from 1.7% the month before and matching the figure in March.

Expect more of the same: Many economists are expecting inflation to remain high as the hikes to diesel and subsidized food combine with higher demand for key commodities including meat on the back of Eid Al Adha at the end of the month. CI Capital in April predicted inflation to “resume its upward trajectory over the coming months” to average 30-32% in 1H 2023, while Capital Economics last week told Reuters the headline rate would hover around 31-32% for “the next few months.”

Complicating matters: The chance of further currency depreciation. Inflation could rise as high as 37% in 3Q 2023 if the EGP weakens further against the USD, Goldman Sachs’ Farouk Soussa is quoted as telling Bloomberg. The USD-EGP rate has remained at 30.90 since the middle of March and some analysts now aren’t expecting any movement until at least September. We have more on the latest predictions for the exchange rate in What We’re Tracking Today, above.

As always, higher inflation may mean higher rates: The hotter reading may put pressure on the CBE to raise interest rates when it next meets to review interest rates on 22 June, Reuters notes. The CBE’s monetary policy committee left rates unchanged at its last meeting in May, saying it would continue to assess the impact of the 1k-bps worth of rate hikes implemented in the past 15 months. That said, analysts including Bloomberg chief EM economist Ziad Daoud have suggested we won’t see movement on rates unless and until the currency depreciates further.

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