Surge in food prices hits the poor as cheap oil boosts the rich

A sharp increase in food prices last year hit Kenya’s urban poor hardest even as falling fuel and electricity prices cut the cost of living for the rich, according to the newly released Economic Survey data.

The annual survey, whose findings were released on Tuesday, shows that food prices rose faster than the cost of other goods to average 11.4 per cent, adding to the burden on Nairobi’s poor who spend a third of their income on food.

“Food inflation was the main driver of inflation for Nairobi’s poor and regions outside the city because food accounts for a larger share of the households’ incomes,” said James Gatungu, the director of production statistics at Kenya National Bureau of Statistics (KNBS).

Average inflation topped 6.9 per cent for the poor in Nairobi and other towns compared to an average of 2.6 per cent for the affluent whose spending power stayed nearly at the previous year’s level.

Life was also much better for Kenya’s middle class whose cost of living rose 4.3 per cent, underlining the disproportionate ways in which the economy affected the different income segments.

Kenya was early last year hit by a dry spell that depressed agricultural output across the board, raising food prices. The heavy El Nino rains that fell in the last quarter of 2015 also dampened agricultural output, further piling pressure on food prices.

The differences in inflation outcomes among the population are linked to the different consumption habits. The cost of living is also impacted by the different shopping basket mix used to measure inflation outside Nairobi, which largely comprises basic items like food.

Nairobi with a higher concentration of wealthy Kenyans spends a smaller portion of its income on necessities like food, making it less prone to changes in prices of agricultural commodities.

Wealthy homes are often cushioned against food inflation because food accounts for a negligible portion of their income unlike the poor, who spend nearly half their income on food.

The recent decline in petroleum prices has continued to reduce motoring and transport expenses for the urban rich, easing the burden on consumers.

Transport takes up the largest share (over a quarter) of the wealthy homes’ budgets, making them the biggest winners of lower petrol prices that dived 11.6 per cent last year in line with a slump in global crude prices.

The low-price party for the rich was further supported by a steady decline in electricity prices, with the drop in tariffs for consumers of more than 50 units monthly. Though life remains expensive in Nairobi, the Economic Survey data shows that the cost of goods is rising faster in the other counties, weakening the purchasing power of workers who on average earn less than their counterparts in the city.

Nairobi’s average cost of living measure stood at 6.1 per cent last year, below the 6.9 per cent for the remaining 46 counties, indicating a faster increase in the cost of goods in the countryside.

Food inflation stood at 11.4 per cent, towering above other goods in the basket that is used to track price changes and to calculate inflation.

Food accounts for the largest share of the basket at 36 per cent, meaning it was the key driver of headline inflation that averaged 6.6 per cent last year.

Despite agriculture accounting for 30 per cent of Kenya’s gross domestic product (GDP), parts of the country have over the years continued to experience famine, exposing  planning deficiencies at the national level.

The slower rise in commodity prices in the city, as measured by inflation, has also been attributed to abundant supply of goods compared to other parts of the country.

Nairobi enjoys a steady supply of commodities, including food, assuring it of stable prices year round.

Dr Gitungu said suppliers are often spurred by the capital’s ready market that is driven by a higher purchasing power that is anchored in higher disposable income.

Nairobi’s poor, who allocate much of their income to food, were left exposed to the rally in food prices that rose 6.9 per cent.

The city’s rich spend most of their income on transport, the middle class on utilities and rent while food takes the bulk of the poor’s budget, according to the survey.

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Poor families in Nairobi spend 42.5 per cent of their income on food, middle class 22 per cent while the rich spend only seven per cent, highlighting the exposure of the poor to a rally in food prices.

The city’s affluent families on average spend the largest portion of their income (27.9 per cent) on transport, gaining from low petroleum prices.

Food on average takes up 36.2 per cent of the budgets of households living outside Nairobi, transports costs 8.4 per cent) and housing and utilities 17.4 per cent.

Nairobi has been associated with hardships arising from high cost of housing and other basic goods and services such as transport, water and electricity.

Previous studies have suggested that a majority of workers would happily move to other towns if an opportunity presented itself. This is in sharp contrast to a decade ago when similar surveys found that nearly 80 per cent of workers and job seekers picked Nairobi as their city of choice, in pursuit of better fortunes.

The government last year increased the minimum wages by 12 per cent to cushion workers in low-cadre jobs from soaring inflation.

Earnings for a general labourer, the lowest paid worker, in Nairobi, Mombasa and Kisumu, grew by Sh1,174 to a minimum of Sh10,955 monthly in 2015.
A similar worker based in other smaller towns earned Sh5,844 monthly, exposing their households to inflationary pressures.

The KNBS defines low-income earners as those spending less than Sh23,670 monthly, middle class (between Sh23,671 and Sh120,000) and upper income (in excess of Sh120,000).