Investors win, workers lose in rollout of new inflation data

The government on Tuesday released new inflation figures showing that the prices of goods and services changed at a much lower pace last month in a move that is expected to spark controversy over the veracity of country’s economic data.

Coming at a time when millions of Kenyans are finding it harder to access basic needs because of the rapid escalation in retail prices, revelation that monthly inflation fell by more than half in October sets up the Kenya National Bureau of Statistics (KNBS) against an uphill task of convincing consumers that data reflects the reality on the ground.

Inflation fell from a high of 17.9 per cent in September to 6.6 per cent in October helped by a change in the method of computation that the bureau of statistics said it will henceforth use to compile the data.

“We have changed from using arithmetic to geometric method of computing the data because the old formula tends to ‘exaggerate’ the overall figure by a factor of two and due to the bias that comes with price volatility particularly of the food segment of the index,” said the director of KNBS Antony Kilele.

The new instrument of price changes has brought Kenya in the same league with the likes of Uruguay (6.6 per cent) and Kuwait (6.8 per cent and just a few paces from Mexico, Indonesia and Romania all at 6 per cent.

Statisticians at the bureau of statistics, however, said that had the old method been used to compute the figures, inflation would have dropped only marginally to 17.5 per cent from 17.9 per cent in the previous month.

Policy makers reckon the new figures should enhance the country’s investment credentials arguing that the previous sky high inflation — which were the highest in the region — had become the biggest obstacle to selling Kenya as a favourable investment destination.

It made investors view the country as a high-cost production location, they said, giving neighbouring Uganda and Tanzania with an average annual inflation rate of about seven per cent competitive advantage.

Favourable inflation data is also expected to ease the pressure on fund managers running pension funds and other collective investment vehicles such as unit trusts that over the last two years have been posting returns that are way below the inflation levels.

Low inflation figures are however bound to weaken the bargaining strength of workers unions who have been pegging the annual pay negotiations with the management on the prevailing rate of inflation.

That could see unionisable workers take home lower annual increments to the delight of employers keen on cutting costs to protect their sagging profit margins under the current difficult economic environment.

But Central Bank of Kenya (CBK) and the International Monetary Fund (IMF) reckon that the country will draw in huge economic benefit, especially in attracting foreign direct investors at a time when capital flows have dwindled in the wake of the global economic meltdown.

“The older rates affected Kenya’s economy negatively since we were seen as a high inflation country due to the bias,” said Prof Njunguna Ndung’u, the CBK governor, at a press briefing on Tuesday at Treasury.

Since last year, expensive food prices led by the cost of maize flour emerged as the biggest driver of inflation as the country was hit by severe drought and acute supply shortages.

This pushed inflation a peak of 31 per cent in May last year.

This was higher than peak levels witnessed in Tanzania and Uganda.

Tanzania and Uganda recorded peaks of 14.9 per cent and 14.8 per cent respectively over the past two years, a move that led policy analysts led by Prof Ndungu to call for a review of inflation measurement.

Both Uganda and Tanzania have been using the geometric measurement in line with 2004 recommendations from the International Labour Organisation (ILO) consumer price index manual.

This new measures has exited policy makers with the CBK governor saying that they are now nearer to the national figures.

The double digit inflation levels have helped unionisable employees squeeze high pay increments from employers.

Official data indicate that workers on average last year had a raise of 10 per cent from 8.7 per cent and 7.5 per cent in 2007 and 2006 respectively.

In addition, expatriates coming to the country were asking for hefty packages to help compensate for the high costs of living.  

This has contributed in widening the wage of bill of local firms at a time when they reporting lower profitability and also turned away potential investors fearing that the high labour expenses together with high costs of raw materials would make it difficult for them top break even.

“Unions’ position will be weakened if the rates fall since the CBA (Collective Bargaining Agreement) is mainly pegged on cost of living compensation,” says Kuria Muchiro, country manager at consultancy firm PricewaterhouseCoopers (PwC).

This is a big blow to the millions of employees covered by unions whose purchasing power is taking its worst battering in more than a decade as salaries fail to keep pace with the rising costs of living.

It’s not clear how the banking sector will react to the new numbers since last year most of them reviewed their lending rates upwards by between two and 1.5 per cent citing the high rate of inflation.  

These elevated rates have restricted access to credit especially to households, slowing down both production and consumption.