Egypt's headline inflation nears eight-year high in August

Egypt's headline inflation jumped to 15.5 percent in August, its highest level in nearly eight years, raising expectations that the central bank will hike interest rates later this month. The data could prove a headache for President Abdel Fattah al-Sisi, who is under increasing pressure to revive the economy and curb inflation to avoid a backlash from the public.
Annual urban consumer price inflation had been climbing since April but stabilised at 14 percent in July, raising hopes among some economists that the impact of Egypt's currency devaluation in mid-March had begun to fade. August's jump in the headline inflation figure appeared to signal a resumption in the upward trend in prices as an acute dollar shortage continued to raise the cost of imports and the government slashed electricity subsidies.
Egypt's annual core inflation, which strips out the price of volatile items such as fruit and vegetables, jumped to 13.25 percent in August from 12.31 percent in July, the central bank said on Thursday. The increase reflected a rise in food prices for the fifth straight month. "Today's data confirm that the devaluation of the pound has continued to feed through into higher consumer prices. This is now being compounded by the impact of subsidy cuts," London-based Capital Economics wrote in a note to clients.
"As a result, we think the central bank will hike interest rates by 50bp, to 12.25 percent." Egypt's Monetary Policy Committee will hold its next meeting on September 22. Egypt has struggled to restore growth since a 2011 uprising ushered in a period of instability that scared off foreign investors and tourists - key earners of hard currency.
A dollar shortage has severely hit the import-dependent economy and dampened business sentiment. The International Monetary Fund agreed in principle last month to grant Egypt a $12 billion three-year loan facility to support the government's economic reform programme. But the reforms agreed, which include further subsidy cuts and the introduction of Value Added Tax, are likely to further increase inflation. Egypt is also expected to focus its monetary policy on easing the dollar shortage that has put pressure on the pound while reducing inflation to single digits. Achieving those targets will likely entail significant interest rate hikes, economists say.