Egypt wrestling with soaring inflation


Headlines from Cairo suggest that Egypt's inflation is now at an eight year high, challenging a government that has already been looking at central bank action and has taken out a $12 billion loan from the International Monetary Fund.

A Sept. 8 Reuters article shows inflation in Egypt at 15.5 percent, up from recent months and towering far below what most national economies handle.

Experts had hoped that a pause in July meant the peak of the effect of Egypt's currency devaluation over the year, but they were disappointed as inflation increases continued.

Aside from the full inflation figure, Egypt also registered a jump in what it calls “annual core inflation,” which rose to 13.2 percent in August from 12.3 percent in July. The core inflation value strips out the prices of items that constitute more dynamic markets – in the case of the Egypt, this includes the cost of fruits and vegetables.

Analysts expect Egypt's central bank to hike interest rates to around 12.25 percent, with an Egypt Monetary Policy Committee meeting planned for Sept. 22.

Some cite the political instability that has threatened the country since 2011, along with the IMF deal, pressure on the Egyptian pound and massive state subsidies for basic commodities as elements contributing to Egypt's financial crisis.

How do governments handle massive amounts of inflation in tough economic climates?

Jason Fink, a professor at James Madison University in Harrisonburg, Virginia, told the Gulf News Journal that governments have an incentive to reduce the value of their currency, which in this case, has already been happening.

“When you see countries with really high inflation, the government can print money.” Fink said.

Fink also talked about U.S. standards for creating more sophisticated models of inflation.

Fink mentioned the Consumer Price Index, which some describe as a U.S. “core inflation” indicator. The CPI tracks a basket of goods, estimates their value and calculates the amount of inflation accordingly.

It makes sense for countries to use tools like core inflation to dive deeper into what's going on with inflation across economic sectors, Finks said. “Some components are very volatile.” Fink said.

For example, he said, in addition to the Consumer Price Index, there are also smaller subsets of tracking tools, such as the “Urban CPI.” This version of the price index reflects less of the price of gasoline than the general consumer price index. Other factors will also vary in these more precise types of metrics, so that economists and analysts can really get a better picture of what’s happening with domestic prices.

“People rely on those tools pretty heavily.” Fink said.

In addition to borrowing, the Egyptian government has been taking other initiatives to withstand economic pressure, including lifting fuel subsidies and flirting with a value-added tax – but will it be enough? Look for emerging news on Egyptian financial responses to new central bank actions and government initiatives.

 


Organizations in this story

Central Bank of Egypt Cairo, Cairo Governorate, Egypt Cairo, Cairo Governorate

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