Inflation cools post float as traders price in lower exchange rate: Egypt’s annual urban inflation cooled to 33.3% in March, down from 35.7% in February on the back of a softer increase in food prices as traders price in a lower exchange rate, according to figures from state statistics agency Capmas.

This was our first proper look at what the float means for prices: Analysts were split on the impact floating the EGP would have on inflationary pressures. While some analysts predicted that the depreciation of the EGP in the banking system and fuel price hikes would send inflation soaring, a second camp that argued that prices were based on the EGP’s exchange rate in the now defunct parallel market seem to have been proven correct. Now that the EGP is trading in banks for considerably less than on the parallel market before the float, inflationary pressures have begun to ease as traders price in a stronger EGP.

Monthly inflation fell to a six-month low: Monthly headline inflation fell to 1.0%, its lowest rate since October, after reaching its highest recorded m-o-m jump of 11.4% in February.

Core inflation falls: Annual core inflation — which excludes volatile items such as food and fuel — slowed to 33.7% in March, down from 35.1% in February, according to central bank figures. Meanwhile, monthly core inflation fell to 1.4%, down from 6.1% in February.

You can thank food and beverage prices: Food and beverage prices — the largest component of the basket of goods and services used to calculate headline inflation — continued to rise but at a rate of 45.0% y-o-y compared to 50.9% in February. Prices increased by 0.7% m-o-m in March, compared to 16.7% m-o-m in February.

ICYMI: The central bank made it crystal clear when it floated the currency last month 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.

WHAT HAPPENS NEXT-

Prices are expected to keep falling after the Madbouly government directed local manufacturers, suppliers, and retailers to slash commodity prices by up to 30% by the end of Eid Al Fitr. The only way to break the inflationary cycle is to introduce price cuts for major commodities that are proportional to the decline of the USD-EGP exchange rate on the parallel market, Prime Minister Moustafa Madbouly said.

But inflation will likely stay elevated despite slowing in March, as “the effects of the currency fall will continue to feed through over the coming months and keep inflation elevated throughout the rest of 2024,” Capital Economics’ MENA economist James Swanston wrote in a note picked up by Zawya. Inflation will remain above 25% at the close of the year driven by the EGP’s depreciation and price hikes, he added.

Other signs pointing to inflationary pressures persisting include the newly-introduced minimum wage hike for private sector workers and the prospect of further subsidy cuts, HSBC economist Simon Williams said in a note.

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