Inflation hits another all-time high in August: Annual urban inflation jumped to 37.4% in August from 36.5% the month before, marking a third consecutive month of record-breaking highs, according to data released by state statistics agency Capmas (pdf) on Sunday. Inflation has been running above 30% since February as prices soar on the back of a series of currency devaluations.

Price hikes came in hotter than expected: While most analysts had expected inflation to continue to accelerate, the 37.4% headline rate was a bit higher than many expected. The median forecast predicted by analysts in a Reuters poll last week was for 37.1%.

Food prices once again to blame: Food and beverage prices — the largest component of the basket of goods and services used to calculate inflation — hit a record high of 71.4% y-o-y, with meat and poultry prices almost doubling from August 2022 and vegetables surging 92.5%.

Monthly inflation offers some hope: Monthly inflation came in at 1.6%, down from 1.9% in July, marking the third consecutive month in which month-on-month price increases slowed. The cooling monthly figure is “tentatively a sign that prices are consolidating at these levels,” Naeem Brokerage’s Allen Sandeep told Reuters.

Core inflation slows (but maybe not for long?): Core inflation — which strips out volatile items such as food and fuel — recorded 40.4% y-o-y in August, down marginally from 40.7% the month prior, according to central bank data. Economist Mona Bedeir told Enterprise that core inflation is likely to increase in the coming months due to seasonal factors like the back-to-school period, as well as a boom in tourism.

LOOKING AHEAD-

Where does inflation go from here? It depends on the currency: In a note yesterday Al Ahy Pharos said that inflation will “likely remain elevated” until the end of the year. It could start to temper in 2024 due to the favorable base effect though this will depend on how far the EGP falls against the greenback in a devaluation anticipated to occur before the end of the year. Meanwhile, Goldman Sachs is predicting inflation will remain above 30% through to the end of this year before going into “a sharp decline through 2024” — assuming that the EGP doesn’t weaken further against the USD, Bloomberg reports. An earlier Reuters poll had EFG Hermes and Standard Chartered suggesting that there are signs inflation could be slowing.

The target: The CBE is still targeting inflation of 7% on average — plus or minus two percentage points — by 4Q 2024 and 5% by 4Q 2026.

What does this mean for interest rates? Analysts are skeptical that August’s inflation figures will persuade the central bank to raise interest rates when it meets on 21 September, saying movement on the USD-EGP exchange rate is likely to come ahead of any rate rise. “We don’t expect there will be another hike, unless we see some progress on the issue of the exchange rate,” economist Mona Bedeir told Enterprise. “Monetary policy will not anchor inflation expectations without first anchoring expectations of an exchange devaluation,” she said.

Remember: The CBE made a surprise 100-bps rate hike at its last meeting in August in an effort to curb inflation, raising its benchmark rate to 19.25%. The central bank has hiked rates by 1.1k bps since March 2022.

All eyes on the EGP: “We’re still expecting a fourth round of devaluation,” Bedeir told us. “We don’t expect the year to end without seeing another devaluation; the lack of one has been amplifying the crisis and feeding inflation,” she said.

Pundits remain pessimistic on our carry trade: “Egypt’s interest rates are too low to attract foreign capital, despite a surprise hike in August,” said Bloomberg economist Ziad Daoud. “High inflation has pushed Egypt's real rates to be among the lowest in emerging markets. And the risk of devaluation could wipe out interest-rate gains.”

The international p ress also has the story: Bloomberg | Reuters | AFP | Xinhua | The National

Tags: