CAIRO: Egypt’s urban consumer inflation reached 8.6 percent in the year to January, down from 9.6 percent in December, as analysts said the numbers are much lower than expected given the country’s current economic woes.
According to the Central Agency for Public Mobilization and Statistics, headline CPI rose 0.15 percent month-on-month in January after dropping 0.24 percent in December.
Despite negative indicators in the economy, the recent inflation figures are not that “bad” for Egypt, said Angus Blair, a Cairo-based financial analyst.
However, Magda Kandil, economist and executive director of the Egyptian Center for Economic Studies, is wary that the country’s economy may be approaching a standstill, or stagflation.
“Stagflation is a combination of stagnation and inflation, this could be very problematic for the central bank to manage,” she pointed out, as consumers lose confidence in the market while international food and fuel prices rise and the government continues to spend while borrowing at a high rate.
Coupled with a depreciating pound and a widening budget deficit, the slowdown in demand is likely to continue.
“The demand has noticeably slowed causing the economy to slow down,” said Hisham Halaldeen, senior investment analyst at Naeem Holding.
Egypt’s foreign reserves reached $16 billion, falling by $1.7 billion in January. As the economic crisis has depleted almost half of the country’s reserves, which continue to plunge at a rate of almost $2 billion every month.
Core inflation, which strips out subsidized goods and volatile items including fruit and vegetables, rose 0.55 percent month-on-month in January compared to 0.21 percent in December. The annual rate fell to 6.86 percent in January from 7.07 percent in December.
“Inflation could absolutely rise further, the numbers are not alarming in an Egyptian context because the monthly rate is very low, it is a reflection of low demand,” said Kandil.
The depreciating currency is also a discouraging factor as investors and traders seek refuge in the dollar.
“We are not getting the full effect of these negative indicators in the headline inflation, which suggests that there are mitigating factors because it reflects that the economy could be slowing down, it leaves us with a worse situation of stagflation, and we must get out of this,” she stressed.
With the constant rise of global fuel and food prices and sporadic deadly clashes in the country, consumers become more reserved and reluctant to spend. As a result, Egypt’s inflation is expected to reach higher levels.
“If we could put the productivity back on track, we could put the demand back on track and slow down the rate of inflation, while countering the other alluding factors such as devaluation, and international prices,” Kandil added.
The price of fruits and vegetables declined by 0.79 percent in January from the previous month, but was up 24.67 percent year-on-year, though less than December’s annual increase of 33.54 percent.
The central bank recently left its benchmark overnight deposit and lending rates unchanged, saying economic growth remained feeble yet warning that local supply bottlenecks could cause inflation to speed up, Reuters reported.
Egypt’s key lending rate is steady at 10.25 percent and the deposit rate at 9.25 percent; while the discount rate was unchanged at 9.5 percent.
The central bank’s Monetary Policy Committee (MPC) said the economy had grown by only 0.4 percent in the second quarter of 2011 and 0.3 percent in the third quarter.
The MPC also warned of inflation risks in its statement accompanying the rates decision. "The re-emergence of local supply bottlenecks and distortions in the distribution channels pose an upside risk to the inflation outlook," the MPC said in a Reuters report.