The rising fuel prices are likely to test the inflation sweet spot or the government’s midpoint target of five percent according to analysts who see a larger impact from the high cost of petroleum products if sustained.
The observation comes against the backdrop of a disclosure by the Ministry of Energy that the State has depleted the subsidy fund used to stabilise retail fuel prices, which exposes consumers to volatile global shifts that have seen the cost of diesel and petrol jump by at least Sh8.67 per litre in Kenya.
The government has failed to apply the subsidy for two consecutive months since May, with the subsequent higher fuel prices setting the stage for sharper consumer prices, including those for transport, food and energy.
The government targets to keep inflation at between 2.5 percent and 7.5 percent with a sweet spot of five percent, where changes in consumer prices have remained below this midpoint in recent months.
“We have seen the Energy Cabinet Secretary saying the fuel subsidy account is nil. If this persists and we continue to see the increase in prices at the pump by the same magnitude, then this might test that mid-target for inflation,” said Esther Muchai, a senior portfolio manager at ICEA Lion Group.
“We, however, have to be cognisant of the weak demand in the economy where activity is not at the optimal level.”
Fuel prices make for a big contribution to inflation as Kenya relies heavily on diesel for transport, power generation and agriculture, while kerosene is used by many households for cooking and lighting.
A litre of petrol and diesel jumped by Sh8.99 and Sh8.67 respectively to retail at Sh186.31 and Sh171.58 in Nairobi in the latest regulatory review.
A litre of kerosene rose higher by Sh9.65 to Sh156.58 in the capital, with the prices expected to stay in force until August 14.
Headline inflation remained unchanged in June 2025 at 3.8 percent even as food prices ticked higher on a year-on-year basis.
Inflation has remained below the midpoint since June 2024 when the rate stood at a higher 4.6 percent.
The drop in inflation has allowed the Central Bank of Kenya (CBK) to cut interest rates to support the recovery of private sector lending and help lower the banking industry’s non-performing loans.
Analysts at Capital A Investment Bank have also warned of the upside risks to inflation, which they say would further dampen economic activity and strain the State’s fiscal position if it is to resolve reintroducing subsidies.
“The current geopolitical tensions and higher fuel costs signal upward pressure to our initial inflation forecasts, particularly if the conflict escalates. The private sector may face higher operational costs, potentially slowing credit growth and economic recovery, while the government’s fiscal position could be strained by increased subsidy demands or debt-servicing pressures,” the analysts stated.
