Inflation surges to one-year high, bursts CBK target
A shop attendant arranges fruits for sale. Between June and July 2013, food and non-alcoholic drinks’ index decreased by 0.1 per cent. Photo/Joseph Kanyi
What you need to know:
Economists said the uptick in the inflation rate was expected, since the economy is still feeling the hangover from the election period that increased supply of money while slowing production for the better half of the year.
The rising rate of inflation will leave the CBK with little room to lower the central bank rate (CBR) below the 8.5 per cent mark.
The rate of inflation rose to a one-year high of 6.02 per cent in July, driven mainly by rising cost of housing, fuel and transportation.
Data released Wednesday by the Kenya National Bureau of Statistics (KNBS) showed the rate of change in prices of goods and services jumped above the five per cent target set by the banking sector regulator.
The last time that the rate of inflation touched this level was in August 2012, when it stood at 6.09 per cent.
“Between June and July 2013, food and non-alcoholic drinks’ index decreased by 0.1 per cent. This marginal decline in the index was a result of aggregate falls that outweighed rises in the average prices of various food items,” said KNBS in a statement.
Economists said the uptick in the inflation rate was expected, since the economy is still feeling the hangover from the election period that increased supply of money while slowing production for the better half of the year.
“The elections had an effect on some economic variables and inflation was one of them,” said Dr Nelson Wawire, the head of Kenyatta University’s macro-economics department.
Production, he said, had slowed as the country headed towards the March 4 polls and the higher than normal election-related spending worsened the situation.
A market report by Standard Investment Bank quoted East African Breweries’ management saying there was a general slowdown in economic activity in the first four months of 2013 as the country geared up for the General Election.
The marginal decline in some food items last month, however, slowed the rate of inflation.
KNBS data shows that a kilogramme of tomatoes cost Sh91.71 in July, a 7.09 per cent drop, from Sh98.13 in June, while a kilogramme of potatoes dropped to Sh59.73 from Sh60.96, a 2.02 per cent drop over the same time.
A kilogramme of tomatoes and potatoes, however, cost Sh65.87 and Sh50.57 in July 2012.
Heavy rains in the first half of the year prevented a more substantive drop in food prices which could have helped the rate of inflation remain at tolerable rates.
“Crops like beans have not done very well because of the heavy rain,” said Dr Wawire.
The cost of housing and utilities were the main culprits in robbing the shilling of its purchasing power.
“Housing, water, electricity, gas and other fuels’ index, rose by 0.13 per cent between June and July 2013, mainly due to increase in house rent and charcoal,” said the KNBS statement.
A litre of petrol cost Sh111.30 in July, slightly up by 0.92 per cent from Sh110.29 in June 2012.
Other economists had also forecasted that the rate of inflation would cross the six per cent mark and range around this level until the end of the year based on estimates of measures of inflation.
“Beyond this, we expect Consumer Price Index (CPI) to trend between five per cent and seven per cent through to the end of 2013,” said Razia Khan, the head of Africa research at Standard Chartered Bank.
The rising rate of inflation will leave the CBK with little room to lower the central bank rate (CBR) below the 8.5 per cent mark.
Ms Khan, however, said that should the rate of inflation not steeply rise commercial banks should continue with their gradual but slow reduction on their base rates.
Competition in the industry, she said, should catalyse reductions in cost of loans.
