Inflation has never been higher: Inflation accelerated at its fastest-ever rate in June as the impact of multiple currency devaluations combined with higher seasonal demand to send food prices soaring. The annual urban rate of inflation rose to 35.7% y-o-y during the month, up from 32.7% in May, according to figures released on Monday by state statistics agency Capmas.

A ray of sunshine? Maybe? On a monthly basis, inflation slowed to 2.1% in June from 2.7% the month before.

The usual suspect: Food and beverage prices — the largest component of the basket of goods and services used to calculate inflation — accelerated to a record high of 65.9% y-o-y in June from 60.0% the month before.

This was above analysts’ expectations: Analysts we spoke to yesterday had forecast inflation to accelerate at a slower rate, with Prime Securities penciling it in at 33% and economist Mona Bedeir calling a 33.8% rise in prices.

Key drivers: The higher-than-expected surge was “driven mainly by the high demand for core items in the food sector during Eid season,” Bedeir told Enterprise yesterday. This was also due to “an unfavorable base effect coupled with the current underlying inflation pressures arising from the previous FX movements and the supply shortage in important commodities driven by the FX liquidity crisis,” she added.

Core inflation also moved higher: Core inflation — which strips out volatile items such as food and fuel — accelerated to 41.0% in June from 40.3% the month before, according to central bank figures. Monthly core inflation slowed to 1.7% from 2.9% in May. The central bank will publish its monthly note pointing at the causes behind the June inflation reading on Saturday, 15 July.

LOOKING AHEAD-

Analysts don’t see inflation slowing down in the coming months. Here’s why:

A fourth devaluation in September? “We are expecting an FX movement in September coinciding with the combined first and second review of the IMF program but the scale of this movement is dependent on the Central Bank of Egypt’s (CBE) ability to secure external buffers to smooth the potential fluctuation,” said Bedair.

REMEMBER- Speculation among economists is that our USD 3 bn loan program with the IMF will be at a turning pointin September. A first review of the program has been on hold since mid-March after we fell short on meeting several key conditions of the loan agreement.

Electricity + fuel prices: An expected increase in the electricity tariff as well as the “catch up effect” of therecent increase in fuel prices could also drive up inflation in the coming months, she added.

Where’s the peak? “We are expecting inflation to peak in July at above 35% assuming that there will be an increase in the electricity tariff this month,” said Amr Elalfy, head of research at Prime Securities. Bedeir expects a peak in October following the review of the IMF program before inflation starts to subside.

What’s stopping us from raising interest rates to curb inflation? The CBE is likely to leave interest rates unchanged at its next meeting on 3 August, as it did in its June meeting, according to three analysts we talked to yesterday including Elalfy and CI Capital veteran Hany Aboul Fotouh. “Raising interest rates can effectively help in tamping inflation only when there’s clear projections about the future of FX movements, which can only happen when we have enough FX liquidity,” Bedeir said. Central bank governor Hassan Abdalla said earlier this year that additional rate hikes might not do much to slow inflation, which he said was being driven by supply-side factors.

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