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.
