Inflation falls to lowest level in over a year

Annual inflation falls to lowest level in over a year: Annual urban inflation cooled to 28.1% in May, down from 32.5% in April on the back of considerably slower food price increases, as traders continued to price in a lower exchange rate following the float of the EGP, according to figures from state statistics agency Capmas. This is the lowest inflation figure recorded since January 2023.

Driving the fall: Food and beverage prices — the largest component of the basket of goods and services used to calculate headline inflation — continued to rise but a significantly softer rate of 31.0% y-o-y in May, down 9.5 percentage points from a month prior.

Inflation softened across (almost) all segments: “Eleven items of the consumer price index recorded a deceleration by an average of 2.7%, except for “recreation and culture” … due to a surge in “package holidays” item,” Al Ahly Pharos said in a note seen by Enterprise.

Monthly inflation in the negative for the first time in nearly two years: On a monthly basis, inflation fell on all items for the first time since June 2022, with prices falling 0.7% m-o-m. This is the biggest drop inflation has seen m-o-m since June 2019.

The trend persists: Food and beverage prices dipped 3% from the month before, marking the second consecutive month of deflation. This was driven by a dip in the prices of bread and cereals, meat and poultry, and vegetables.

Core inflation: Annual core inflation — which excludes volatile items such as food and fuel — slowed to 27.1%, down from 31.8% in April, according to data from the Central Bank of Egypt. Monthly core inflation, meanwhile, was in the negative, recording -0.8%, down from 0.3% the month before.

Even better than expected: Analysts polled by Reuters and Bloomberg saw inflation cooling, but not as much as it did. The 19 analysts polled by Reuters saw headline inflation decreasing to a median of 30.4%.

Don’t celebrate yet: “Disinflation might be temporarily interrupted by mid-year readings due to measures including decreasing subsidies on bread, higher electricity and meds prices, and a potential hike in petroleum products’ prices,” Al Ahly Pharos says. Thndr Securities’ Amr Elalfy agrees, telling Enterprise that “these pressures may push inflation to rebound towards 30% or slightly higher.” While “favorable base effects may mitigate some impacts of these measures, we must remain vigilant about their influence on inflation figures,” economist Mona Bedeir said in a note shared on LinkedIn.

What does this mean for monetary policy going forward? Don’t expect cuts before “there are clear signs of tamed inflation and well-anchored inflation expectations,” Bedeir said, adding that she doesn’t see the central bank cutting rates before 4Q 2024. Meanwhile, Capital Economics’ MENA economist James Swanston sees the central bank cutting rates even later, penciling in early next year.

Things could look up later in the year: “We expect the disinflation process to resume later in the year and into 2025,” Swanston added.

The international press also picked up the story: Reuters