Inflation slips to its lowest level in nearly 3 years in February

Annual headline urban inflation plunged to 12.8% in February, marking an 11.2 percentage point drop from the 24.0% recorded in January, according to data from state statistics agency Capmas. This figure marks the nation’s lowest inflation reading since March 2022 when inflation recorded 10.49% and has stayed above single digits since. On a monthly basis, inflation fell by 0.1 percentage points to 1.4%.

F&B price inflation saw a significant drop: Food and beverage price inflation — the largest component of the basket of goods and services used to calculate headline inflation — fell by 17.1 percentage points to 3.7% in February — its weakest pace since June 2021, Capital Economics’ James Swanston wrote in a note seen by EnterpriseAM. “Meanwhile, our measure of non-food inflation declined to a two-year low of 17.3% y-o-y with the largest falls recorded in health, recreation and culture, furnishings, and restaurants and hotels,” the note reads. On a monthly basis, food and beverages prices were up by 0.2%, marking the second consecutive monthly rise in prices.

Annual core inflation — which excludes volatile items like food and fuel — dropped by 12.6 percentage points from January’s 22.6% to record 10.0%, according to data from the Central Bank of Egypt. On a monthly basis, core inflation stood at 1.6% in February, compared to 1.7% in January.

Everyone expected inflation to fall — the question was by how much: Analysts polled by EnterpriseAM were only divided over just how far the month’s annual headline urban inflation reading will fall, with some having correctly predicted that the figure could inch close to a single digit on the back of a favorable base effect. The median forecast of the ten analysts we polled last week was for annual headline urban inflation to fall to 14.3%. Meanwhile, a Reuters poll showed a similar median prediction of inflation falling to 14.5%.

Driving the drop: “First of all, the significant base year effect will be one of the driving factors to making inflation fall below 20%, and it will come despite seasonal pressures related to food inflation, with goods including poultry seeing an increase in prices with the beginning of Ramadan. Other factors include possible changes in the education and healthcare baskets, which could also influence the reading,” economist Mona Bedeir told EnterpriseAM last week.

The favorable base effect played a big role: “February inflation reading enjoyed a particularly strong base effect coinciding with a comparable period that was exceptionally cruel with respect to monthly inflation reading. February 2024 recorded more than 11% m-o-m, which was the highest increase for a single month on our records,” Al Ahly Pharos Senior Economist Esraa Ahmed told us.

Analysts react: “February inflation came lower than our estimate of 14.5% y-o-y and 2.9% m-o-m. We attribute the significant y-o-y drop to the favorable base year effect and the availability of lower-priced goods at government outlets in preparation for Ramadan,” HC Securities’ Heba Monir told EnterpriseAM.

Moving forward: “Over the coming months, we expect the headline rate will continue to slow and fall back within the CBE’s inflation target range of 7±2% in 2Q, where it is likely to hover for much of this year,” Swanston said.

WHAT THIS MEANS FOR INTEREST RATES-

Slowing inflation will have a big role to play in the next Monetary Policy Committee (MPC) meeting: Previous statements by the CBE have pointed at wanting to see a sharper and sustained fall in the headline inflation rate, and with earlier falls in the EGP now falling out of the annual price comparison, we suspect that February and March's inflation data will provide policymakers with the evidence to loosen monetary policy, Swanston told us.

A cut is not set in stone, however: Some of the analysts who spoke to EnterpriseAM indicated that the MPC could adopt a more cautious approach and keep interest rates unchanged temporarily to monitor conditions before initiating a gradual reduction later in the year. “We believe the CBE might prefer a relatively gradual easing path, maybe starting with a 200-bps cut in its coming meeting, with its eyes wide open given some expected inflationary pressures during some months and, equally importantly, global adverse factors including high uncertainties pertaining to Trump II policies as well as the surrounding geopolitics.” Ahmed said.

REMEMBER- The MPC decided to keep interest rates unchanged when it held its first meeting of the year in February, in what was expected by some to be the beginning of its long-awaited monetary easing cycle. The MPC deemed that “the current policy rates are appropriate to maintain a sufficiently tight monetary stance. This will ensure the realization of the projected disinflation path, and firmly anchor inflation expectations. Accordingly, the Committee’s decisions regarding the appropriate time for beginning the accommodative cycle will be assessed on a meeting-by-meeting basis.”