Explaining an enigma: Inflation rates declining but prices keep rising in Egypt

The easy answer to this confusion is that reduced inflation is still inflation, meaning that prices are still increasing, albeit at a slower pace.

In November, Egypt’s annual headline inflation decelerated to 36.4 percent, down from 38.5 percent in October, according to CAPMAS.

The CBE’s data also showed a 1.6 percent decline in core inflation, which reached 38.1 percent. These figures are much higher than the bank’s targets of reducing inflation to 7 percent (±2 percent) on average by the fourth quarter of 2024 and 5 percent (±2 percent) on average by the fourth quarter of 2026.

“The increase in prices of the basket of goods and services included in inflation measurements curbed the purchasing power of Egyptians which contributed to the deceleration of inflation rates,” economist Hanian El-Mahdy told Ahram Online.

As for the question of measurement, banking expert Mohamed El-Beih explained that CBE excludes some volatile items from its measurement of the core inflation, which include items priced by the government, like fuel, and seasonally priced items, like vegetables and fruits.

Black market pricing
 

Another driver of inflation in Egypt is the dual pricing for multiple commodities, including sugar, which is sold for more than EGP 50 per kilogram despite being officially priced by the government at EGP 27.  Such a disparity was ascribed by some observers to the rise of the USD/EGP exchange rate in the black market.

“The pricing of goods and services based on the USD exchange rate in the black market—rather than the official exchange rate in banks—has inflated prices. To curb this inflation bubble, there's a pressing need for the CBE to enforce a single official exchange rate, promoting fair pricing and combating inflation,” El-Mahdy commented.

“The prevailing flexible exchange rate policy, aligned with IMF recommendations, hasn't remedied our economic woes. Egypt heavily relies on USD earnings from tourism, the Suez Canal, and other sources, lacking a robust industrial capacity to export using its currency,” she added.

Since March 2022, Egypt has devalued its currency three times in response to a foreign currency crunch. With these three waves of devaluation, the pound has lost over 75 percent of its value against the US dollar since March 2022. The USD now equals around EGP 31 in the official market and hovers around EGP 50 in the parallel market.

However, El-Beih deems it reasonable for measurements of inflation to include only official prices. “When measuring inflation, we consider the average price of commodities between consumer complexes and free markets. However, certain goods like sugar, dictated by government-set prices in consumer complexes, cannot be solely measured by free market prices.”

The Egyptian government imposed a three-month ban on sugar exports in March, with exceptions for excess production, which was reinstated for another three months in September and extended again on Thursday.  A similar ban was applied and reinstated on the exports of onions, the prices of which fluctuated between EGP 40 in EGP 50 recently. 

On Tuesday, Minister of Supply and Internal Trade Ali El-Moslhi stated that Egypt’s strategic sugar reserves can cover local consumption needs for almost eight months. Most recently, Prime Minister Mostafa Madbouly called for regular reports on sugar prices in the markets until they stabilize at the desired EGP 27 per kilogram level.