Saudi Arabia and Egypt Face Increasing Inflationary Pressures

In contrast to other regions, February’s inflation data from Saudi Arabia and Egypt show that price pressures are mounting, according to Capital Economics.

Going by the report of Capital Economics, in Saudi strong domestic demand and favorable base effects are largely to blame. Meanwhile, the increase in Egypt’s inflation is mostly due to higher energy prices feeding into food and utilities inflation.

Saudi Arabia’s inflation edged up slightly to 5.4 percent y/y last month, from 5.3 percent y/y in January. Capital Economics says that on the back of strong domestic demand and favorable base effects, both food and housing inflation increased in February. Food inflation, which accounts for a quarter of the consumer price basket, rose from 3.9 percent y/y in January to 4.3 percent y/y last month. Housing inflation rose to a 21-month high of 9.3 percent y/y in February.

Capital Economics points out that since most utility prices are subsidized the increase in housing inflation is due to rents. This will be a major concern for the government, given that over two-thirds of Saudi nationals rent their homes.

On a positive note, Capital Economics states that Saudi Arabia’s inflation should begin to fall for two reasons. First, since it is expected that the global recovery will disappoint this year commodity prices are likely to fall. Second, the upward pressure on inflation from favorable base effects should begin to fade in the coming months. Accordingly, Capital Economics has forecast that headline inflation is not expected to average more than 5 percent y/y in 2012.

Meanwhile, Egypt’s headline inflation rose from 8.6 percent y/y in January to 9.2 percent y/y last month. Middle East Economist of Capital Economics Said Hirsh says that the rise in headline inflation can be largely explained by the increase in food inflation – which accounts for nearly half of the consumer price basket – to 12.9 percent y/y last month, up from 11.4 percent y/y in January.

Capital Economics adds that housing and utilities inflation also rose which helps to explain last month’s increase in core inflation. On a positive note Capital Economics has said that since oil prices are expected to drop in the coming months, inflation could fall and average only 8 percent y/y in 2012.

Capital Economics says that though mounting price pressures in Egypt point to a possible rate hike this month, it is not expected.

First, core inflation, the central bank’s preferred measure is still in single digits. Second, recent industrial production data show that the domestic economy is still weak. Finally, last year’s 100 basis points hike in the benchmark interest rate did nothing to slow the rate of capital outflows. So Capital Economics forecast is that rates will remain unchanged in Egypt in March.