Annual headline urban inflation dipped to 24.0% in January, marking a 0.1 percentage point drop from the 24.1% recorded in December, according to data from state statistics agency Capmas. This figure marks the nation’s lowest inflation reading since December 2022 when inflation recorded 21.3%, which marked the beginning of an upward trend that has been slowing down for three consecutive months. On a monthly basis, inflation rose 1.3 percentage points to 1.5%.

F&B price inflation reversed its downward trend: Food and beverage price inflation — the largest component of the basket of goods and services used to calculate headline inflation — inched up 0.5 percentage points in January to 20.8%. On a monthly basis, food and beverages prices were up by 1.8%, offsetting a drop that lasted for two consecutive months — food and beverage prices saw monthly declines of 1.5% and 1.9% in December and November, respectively. Al Ahly Pharos Senior Economist Esraa Ahmed identified meat and poultry as helping drive the trend, in a comment to EnterpriseAM, which she said “might be linked to seasonal factors.”

Healthcare prices had a big impact on the month’s inflation reading: “We expected inflation to slow to 23% y-o-y, with m-o-m inflation at around 0.5-0.8%. This month’s results were driven by a 4.8% monthly rise in healthcare service prices, primarily due to higher medicine costs,” economist Mona Bedair told EnterpriseAM.

Annual core inflation — which excludes volatile items like food and fuel — decreased by 0.6 percentage points from December’s 23.2% to record 22.6%, according to data from the Central Bank of Egypt. On a monthly basis, core inflation stood at 1.7% in January, compared to 0.9% in December 2024.

Was the modest slowdown of headline inflation anticipated? The reading came in line with the forecast by local analysts polled by Morgan Stanley last month, who cited a “recent softness” in fruit and vegetable prices. However, it was 1.0 percentage point higher than the median projection of 17 analysts in a Reuters poll last week, who saw annual urban consumer inflation to have fallen to 23.0% y-o-y in January.

“January inflation came in higher than our estimate of 22.8% y-o-y and 0.6% m-o-m. Other than the m-o-m increase in food and beverage prices, medical care prices increased 4.8% m-o-m, clothing and footwear prices increased 1.7% m-o-m, furniture and equipment prices increased 1.6% m-o-m, and hotels and restaurants prices increased 1.0% m-o-m,” HC’s Heba Mounir told EnterpriseAM.

REMEMBER- The central bank decided to extend its inflation targets to an average of 7% ±2 percentage points by 4Q 2026 and 5% ±2 percentage points by 4Q 2028 during its latest Monetary Policy Committee meeting in an effort to “allow for more room to weather price shocks without requiring further stringent monetary tightening.” The CBE was previously targeting inflation to average 7% ±2 percentage points by 4Q 2024 and 5% ±2 percentage points by 4Q 2026.

CAN WE SAY THE WORST IS OVER?

Inflation could see a sharp dip this year thanks to the base effect: Some analysts see the downward trend slowing after January, with Morgan Stanley seeing stronger consumer demand for Ramadan accelerating monthly inflation in February and March, before eventually falling to 14-15% y-o-y, aided by strong base effects from last year. Meanwhile, Fitch Solutions’ research unit BMI sees inflation reaching around 16% y-o-y by February, but “temporary spikes from further price hikes will keep it above the CBE’s 5-9% target range,” the agency said in its latest country risk report for Egypt. Fitch sees inflation reaching 15.7% by the end of the year, with average inflation throughout the year coming in at 18.4%, down from 29% in 2024.

What can we expect from February’s inflation reading? “We believe some pressures are expected to persist in February reading, mainly those related to seasonal imports for Ramadan, and the education item expected to be released,” Ahmed told us.

A slow down to a single digit by April? “The headline rate will decline sharply in February as earlier falls in the EGP fall out of the annual price comparison, though inflation will remain above the upper bound of the CBE’s 7 ±2% inflation target range. Inflation should slow back to a single digit pace by April,” Capital Economics’ James Swanston said in a note.

What does this mean for interest rates? Some believe that the sustained downward trajectory suggests that there is room for the Central Bank of Egypt to start its monetary easing cycle when its Monetary Policy Committee meets next week to decide on interest rates, although the slight dip could probably affect the size of the potential cut. “There’s room for the CBE to reduce interest rates by around 100-200 bps, but it’s more likely for it to fall by 100 bps due to the slower-than-expected drop in the inflation reading,” Bedair told us.

2025 projections: HC’s Mounir sees interest rates going down by around 500 bps by the end of the year, as she sees “inflation slowing throughout 2025, supported by a positive base effect.” Meanwhile, Bedair anticipates “an 800-1k bps reduction in rates throughout the year, assuming that there are no unexpected circumstances affecting the basket of goods and services used to calculate headline inflation.

Tags: