Annual inflation jumps to 35.7% in February, defying analyst forecasts

Inflation unexpectedly up, after easing for four months straight: Annual urban inflation jumped 5.9 percentage points to 35.7% in February from the month before on the back of an unexpected jump in food prices, according to figures from state statistics agency Capmas.

Monthly inflation tells the same story: Monthly inflation climbed to 11.4% in February, up from 1.6% the month before. This marks Egypt’s highest m-o-m jump in inflation, according to Bloomberg-compiled data that goes back to 2007.

Core Inflation accelerates: Annual core inflation — which excludes volatile items such as food and fuel — rose to 35.1% in February, up from 29% in January, according to central bank figures. Meanwhile, monthly core inflation surged to 6.1% from 2.2% in January.

No one saw this coming: Inflation had been cooling for four consecutive months after reaching a record 38.0% in September and reached its lowest level in a year in January, convincing policymakers and analysts alike that the economy was on a disinflationary path. Annual urban inflation was expected to slow to 25.1% on the back of a favorable base effect, according to a median forecast of 14 analysts in a poll by Reuters published over the weekend, with some even expecting the rate to cool to as low as 23.6%.

Food and beverage prices are culprit #1: Food and beverage prices — the largest component of the basket of goods and services used to calculate inflation — climbed by 50.9% y-o-y and 16.7% m-o-m in February.

But it wasn’t just food and beverage prices to blame this time round: Naeem Brokerage’s Allen Sandeep told Bloomberg that “unexpectedly large spikes” in food, health, and education prices drove an increase in inflation. The sector that faced the biggest increase in prices was alcohol and tobacco, coming in at 93.5% y-o-y and 8.5% m-o-m for the month.

The parallel market also deserves some of the blame: The “spike in the EGP’s parallel rate during the month to historical highs before it trended lower” also contributed to the unexpected jump in inflation, according to EFG Hermes’ Mohamed Abu Basha told Bloomberg.

Some were expecting an uptick in inflation to come, but not in February: The unexpected increase in inflation reflects prices in the month before the central bank floated the EGP and moved forward with a jumbo rate hike, which some believe will add additional inflationary pressures. The government is also expected to push ahead with a round of subsidy cuts that will increase the costs of consumer goods.

But others argue that the float could help us tackle inflation: Some commodity prices — such as the price of cooking oil — have already started to decline, Federation of Chambers of Commerce Secretary-General Alaa Ezz said on Thursday. The return of FX liquidity to the official banking system should also increase the supply of goods, leading to competition that will help drive prices down, Ezz added. On top of this, goods in store were prices at an implied exchange rate of around EGP 70 against the greenback, which should mean that we will soon see a fall in prices as sellers reprice goods — the USD was selling for EGP49.15-49.30 when banks closed yesterday.

ICYMI- The central bank made it crystal clear when it floated the currency last week that the country will “continue the transition to a flexible inflation targeting regime … and continue to target inflation as its nominal anchor.” This has been a long-held directive from the IMF during its loan negotiations with the government.

The uptick in inflation may make our local debt look much less attractive to investors: On the day after the float, the central bank reportedly raised EGP 87.8 bn in a one-year t-bill auction and JPMorgan along with Citigroup recommended that its clients stock up, but“high inflation readings cast their shadows on currency expectations as well as the local debt market” Al Ahly Pharos economist Esraa Ahmed told Enterprise. “The local debt market is expected to benefit from the recent CBE measures, yet surprisingly high inflation readings might lessen or slow down such benefits,” Ahmed explained.