Inflation accelerated at a record pace for the second month running in July , as surging food costs and the impact of a series of devaluations maintained upward pressure on prices. The annual urban rate of inflation inched up to 36.5% y-o-y during the month from 35.7% in June, according to figures released on Thursday by state statistics agency Capmas.

On a monthly basis, inflation slowed for a second consecutive month , coming in at 1.9% from against 2.1% in June.

Food remains the pain point: Food and beverage prices — the largest component of the basket of goods and services used to calculate inflation — rose 68.4% y-o-y in July, faster than the 65.9% rate the month before.

Analysts predicted this: HC Securities’ Heba Mounir had forecast inflation to rise to 36.6% y-o-y, while Capital Economics’ James Swanston was expecting inflation of 36.7%.

Core inflation remains elevated: Core inflation — which strips out volatile items such as food and fuel — dipped to 40.7% y-o-y in July from June’s record high of 41%, according to central bank data. Monthly core inflation fell to 1.3% in July from 1.7% in June. The central bank will publish its monthly note pointing at the causes behind the July inflation reading on 15 August.

A new commodities crunch? Hikes in the prices of commodities including tobacco and sugar were among the key drivers of inflation in July. Global factors — including the negative impact of El Niño’s hotter weather on sugar crops — were exacerbated by ongoing import difficulties and stockpiling by some traders, economic analyst Hany Geneina told Enterprise. The end of the Black Sea grain pact between Russia and Ukraine, and India’s decision to ban exports of non-basmati white rice, are expected to put pressure on local wheat and rice markets in the months to come, S&P Global’s Yasmine Ghozzi said in a LinkedIn post.

LOOKING AHEAD-

All eyes are still on the exchange rate: Some analysts expect the EGP will weaken this fall — a development that could drive inflation still higher. S&P Global is predicting an FX adjustment in September or October in tandem with the delayed IMF review of our USD 3 bn loan program. The financial services firm sees the EGP ending the year at 37 to the USD.

Price hikes to peak in 4Q? The expected further devaluation, “coupled with the expected electricity tariff hikes that the government has been pushing back,” means inflation will likely “continue its upward trajectory to peak in October,” said economist Mona Bedeir. S&P Global’s Ghozzi is also predicting a peak of “close to 39%” y-o-y in October, “ending the year at close to 35% in 2023 and 20% in 2024.” Geneina is forecasting price hikes to peak at around 45% annually by the end of this year, while banking veteran Hany Aboul Fotouh also thinks inflation won’t start to come down until 1Q 2024.

Pundits don’t see inflation disappearing after 4Q: Look for it to remain north of 30% next year after averaging 24.4% in 2023, the IMF said last month.

Where are interest rates headed next? Following its surprise 100-bps interest rate hike last week, the central bank will hike rates by another 200 bps before the end of 2023 in a bid to curb inflation, both Ghozzi and Geneina predict. The central bank has now hiked rates by 11% since March 2022 and is still targeting inflation of 7% (+/- 2 percentage points) on average by 4Q 2024.

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