Egypt's urban inflation rate spikes to highest in three years

May marks sixth consecutive month that inflation has increased as food and energy prices continue to rise

Wheat is a strategic commodity in Egypt and is used to make cheap bread. Bloomberg

Egypt's annual urban consumer inflation rose to 13.5 per cent year-on-year in May, the highest in three years, data released on Thursday by state statistics agency Capmas showed.

Inflation rose from 13.1 per cent in April and marks the sixth consecutive monthly increase, mostly on the back of higher food and energy prices coupled with Egypt’s recent currency devaluation against the US dollar.

A nearly 25 per cent increase in the price of food and beverages, the biggest component of the basket used to gauge inflation, is driving the rise.

On a monthly basis, inflation slowed to 1.1 per cent in May, down from 3.3 per cent in April.

The rate was “well above our expectation of 12.3 per cent as monthly inflation was much higher than anticipated”, Naeem Brokerage said in a research note.

“The continued higher-level inflation readings are predominantly a reflection of both cost-push factors, including higher global commodity indices and a weaker EGP, and lower supplies,” it said.

The latest figures show the growing pressures on consumers in the most populous Arab nation, which is the world’s largest importer of wheat.

Russia and Ukraine collectively account for about a quarter of global wheat supply. Before the war in Ukraine, Russia was the world’s largest wheat exporter and Ukraine the fifth, World Bank figures show. But the conflict cut off supply to global markets and spiked up prices of the commodity.

Egypt had relied on Russia and Ukraine for about 80 per cent of its wheat imports, amounting to more than 10 million tonnes last year.

The continuing conflict in Ukraine hit the Egyptian economy hard at a time when it was already smarting from the economic devastation caused by the coronavirus pandemic.

Since Russia invaded Ukraine in February, Egypt has had to devalue its currency by 14 per cent, increase interest rates, ban exports of essential foodstuffs including wheat and open negotiations with the International Monetary Fund on a bail-out package, possibly including a loan.

The uncertainty created by the European conflict has also forced a foreign outflow of about $20 billion from Egypt’s local debt market. The war has also dealt a blow to the vital tourism industry, which had relied on Russia and Ukraine for a third of all its visitors.

At current inflation levels, Egypt’s real interest rates are in negative territory, Dubai's largest lender Emirates NBD said.

The Central Bank of Egypt increased its benchmark overnight deposit rate by 200 basis points to 11.25 per cent in May, taking the total to 300bps.

The regulator is due to meet later this month and is likely to announce a further 150bps increase in the rates, Emirates NBD said.

Wheat is a strategic commodity in Egypt and is used to make cheap bread for the more than 70 million people who take part in a subsidised food card system. Facing a steep rise in the price of wheat, the government has intervened to fix the price of free market bread on which much of the population depends.

This week, Agriculture Minister El Sayed El Qoseir said authorities have procured 3.74 million tonnes of locally grown wheat, crossing the halfway mark of the six million-tonne target they want stored in state silos by the end of August.

This year’s harvest is expected to be about 10 million tonnes.

“Government efforts to limit the pass-through of the global surge in wheat prices through introducing price caps and sourcing from new markets such as India should help limit any further growth in food prices, and global wheat prices have eased a little in recent weeks,” Daniel Richards, Mena economist at Emirates NBD, said in a note.

“Already the month-on-month rise in food prices in Egypt has slowed sharply to 0.6 per cent last month from 7.6 per cent in April. Nevertheless, the yearly inflation rate will remain high for the time being, with global food and other commodity prices remaining elevated and the Egyptian pound weaker than a year ago.”

For the month of June, assuming there are “no major shifts” in the exchange rate, preliminary indications are that inflation is likely to cool off, Naeem Research said.