Policy Viewpoints

Relative Price Adjustment and Inflation Dynamics: The Case of Egypt

Publication Number: ECESWP133-E

May, 2008

Author : Diaa Noureldin

Type : Working Papers

This paper examines the role of relative price adjustment (RPA) as a key determinant of inflation in Egypt during the two recent inflationary waves starting 2003. The first three moments (the mean, variance and skewness) of the cross-section distribution of the detailed components of the Consumer Price Index (CPI) are analyzed to show how an increase in the intensity of RPA led to higher inflation. The effect of the recent inflationary shocks (the exchange rate devaluation; floatation of the pound; energy price increases; and the outbreak of the avian flu virus) on overall inflation is analyzed through the role of RPA. In addition, a GARCH-in-mean model of the inflation process is utilized to shed further light on the interaction of RPA and inflation uncertainty to keep inflation on a higher and more volatile path in recent years.