Inflation in Egypt increased by 12.4 per cent year-on-year in May as price pressures continue following the devaluation of the pound in March this year.

Data from the London-based Capital Economics shows that Egypt’s headline inflation rate (which covers urban consumers only) rose from 10.3 per cent year-on-year in April to 12.3 per cent year-on-year in May.

In what has been the highest rate in over 12 months, Capital Economics adds that the rise in inflation was driven by the increase in both food and medical costs. In May the government decided to hike medicine prices, which Capital Economics predicts in a recently published research note added 1.1 percentage point to the headline inflation rate.

The cost of living in Egypt has continued to increase over the past 12 months and despite the raising of interest rates by the Central Bank of Egypt (CBE) to counter the currency devaluation, it has done little to alleviate rising costs.

Despite this, Egypt is likely to continue with a policy of monetary tightening as it tries to manage the shortage of foreign currency amid declining tourism revenues. Capital Economics also says that many will be anticipating the CBE’s policy meeting on 16 June.

The cost of living is a sensitive topic for the government due to the social and political implications that follow the civil unrest it often causes amongst the poorest groups of Egyptian society.

The introduction of a value added tax, which was approved by the cabinet earlier this year, is also likely to increase prices and add further pressure on the government.

The VAT law is intended to replace Egypt’s general sales tax, and is a key component of the government’s economic reform programme announced last year.

Officials predict introducing a VAT will bring in up to £E30bn ($330m) in new tax revenue. The Ministry of Finance said in a statement that the VAT “realises justice and eases burden on lower-income segments,” saying the greatest burden of the new tax would fall on Egypt’s wealthiest 20 per cent.

The decision to introduce a VAT is related to a loan agreement with the World Bank which requires Egypt to adopt the tax before the transfer of the first installment of a $3bn loan agreed in December 2015.

Local analysts have previously told MEED that Cairo has been hesitant to impose a VAT amid rising living costs and public dissent, as living conditions deteriorate with little sign of improvement.

Subsidy cuts over the past two years have significantly increased water, electricity and, in particular, fuel prices.