High food, energy prices add impetus to inflation

Average price changes of basic items between July 2011 and August 2011

Kenya’s inflation rate touched a new high in August, eating deeper into household budgets and becoming the biggest threat to economic growth this year.

Month on month headline inflation rose by more than one percentage point to 16.67 per cent mainly driven by a steep rise in the cost of food, transport, restaurants and hotels, according to the Kenya National Bureau of Statistics (KNBS).

An acute shortage of sugar that lasted for most part of the month and the resulting surge in retail prices pushed up the food and non-alcoholic beverages component of the consumer price index (CPI), adding impetus to the overall inflation rate.

The rise in the cost of living has also gained momentum from a weakening of the shilling, which has increased the cost of imported goods and complicated the management of monetary policy.

Though central banks have traditionally responded to inflationary pressure with a tightening of monetary policy, a fragile growth and a build-up of public debt to more than half the gross domestic product has made the Kenyan situation much more complex. These and the fact that the surge in price has been mostly attributed to supply side shortages outside the province of monetary policy have made it difficult for the Central Bank of Kenya (CBK) to discharge its mandate of keeping prices stable and spurring growth.

In recent weeks, the CBK has struggled to stop the shilling’s slide by making it difficult for commercial banks to borrow from the overnight window -- hoping that such action would force the lenders to sell the huge piles of hard currency they hold but that has had the reverse effect of increasing the cost interbank lending causing fear of a looming general rise of lending rates in the retail market.

It has kept the benchmark CBR at a low of 6.25 per cent running against all expectation given that inflation was 15.53 per cent – three times the target 5 per cent.

One view has it that keeping the CBR low helps keep the cost of borrowing for government low – an important measure given Treasury’s increasing reliance on the domestic market for debt financing.

Economists reckon that should the current trend continue, the economy will lose the gains made in sectors such as infrastructure and close the year below the target 5.7 per cent.

“Realising the target growth will be a challenge because high inflation limits consumer spending and inevitably hurts growth,” said PineBridge Investments senior manager Edward Gitahi.

“Interest rates will keep rising if the cost of food, and fuel stay on the upward with the current monetary policy stance,” he said.

The firm has since downgraded its growth expectations for the year to between 4.5 and 5.0 per cent from an earlier forecast of over six per cent, an outcome that could ultimately hurt corporate profits.

At this rate, corporate profits could grow at the modest rate of between 15 and 20 per cent keeping annual bonuses at a one month level with wider ramifications across various sectors of the economy.

Failure to implement proper food security programmes as well as a high dependency on imports is being blamed for the current crisis.

A recent consumer spending survey conducted by Consumer Insight indicates that Kenyans have cut down on the amount spent per shopping experience owing to the high cost of goods.

“Customers who do not have enough money to do bulk shopping break up their lists and only buy on a need-to-use basis, keeping the bills at an average of Sh1,000 and below,” said Nduku Mulwa, the Director of Research the firm said.

Kenya’s emerging middle class and the best paid workers seem to be facing less pressure from the soaring food and fuel prices as their monthly inflation stood at 10.15 per cent and 11.67 per cent respectively.

Sugar for instance has maintained its upward price climb with millers recently warned that the high prices will persist till early next year citing acute shortage of cane that has reduced local output and forced the market to rely on expensive imports from Latin America.

“There are expectations of relatively higher prices in the medium term driven by increased demand and inability of local millers to meet the requirement,” said Mumias Sugar in a statement.

A kilogramme of sugar has rise from an average of Sh75 per kilogramme in January to Sh200 this month as cane shortage forced most of the millers to operate below capacity, causing an acute supply shortage in the market. See: Sugar hits Sh200 per kilo as supply shortage persists

Persistent shortage of sugar has forced most retailers to ration the commodity.

Fuel too has been on the climb with the monthly price reviews released by the Energy Regulatory Commission (ERC) a fortnight ago priced paraffin at Sh88.96 per litre up from Sh86.16 per litre while diesel rose to Sh108.97 per litre from Sh115.4.

Petrol prices slowed down to Sh116.71, increasing by 1.28 a litre.

A recent relief in international crude prices, if sustained, could however serve to cushion the country though it was not apparent in the last review as a weakening shilling eroded any gains that were to be noted.

“Any decreases in the procurement costs realised during the month of August will be passed on to consumers in the next price review. This will however only be the case if value of the shilling improves,” added Mr Mwirichia.

The latest review was based on an exchange rate of Sh90.25 to the dollar compared but the shilling has since dropped to record lows of Sh94—negating the effect of cheaper international prices.

On Friday last week the government finally admitted that its monetary policy was off the track and it was in need of urgent fixed to shield the country’s fragile economic growth from stalling.

Finance minister Uhuru Kenyatta said there was a need to restore monetary stability and arrest inflation, which he said was way above the target range and was causing shocks in East Africa’s largest economy.

“We need to take some action towards that end to restore some kind of stability on the monetary side of our affairs,” he said as he revealed that the Treasury had opened discussions with the Central Bank to deal with the matter.

A recent weakening of the shilling against major world currencies has also contributed to the high cost of importing goods such as sugar.

The shilling has lost 22 per cent to the dollar since the start of the year and closed trading last week at Sh92.50 to the greenback.

The increase in the local pump price defied the falling international prices—where growing gloom about the economy has pushed down oil cost and an array of other commodities—due to the weak shilling against the dollar.

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