Average prices of goods and services are seen rising by six percent this year despite projected favourable weather which will likely boost food production that has a higher weighting in cost of living measure.
A consensus outlook from 14 global banks, consultancies and think-tanks shows inflation — a gauge for annual changes in the cost of living — will average 6.1 percent in 2022 on the higher cost of key imports amid weakening shilling.
This is despite inflation falling to a 16-month low of 5.1 percent in February, having dropped steadily since recent peak of 6.91 percent last September on the back of slower growth in food items, flat fuel prices and a fall in electricity bills.
The outlook, compiled by Barcelona-based FocusEconomics, does not factor in the debilitating impact of economic sanctions imposed on Russia for its brutal invasion of Ukraine which has worsened disruptions in global supply chains and trade.
That has, as a result, constrained global distribution of oil, cooking gas and wheat whose prices have touched historic highs, hitting countries such as Kenya and posing higher upward pressure on the cost of living.
“A further rise in oil prices and faster currency depreciation will be key sources of inflation in 2022, with an average rate of 6 percent expected, close to the long-term trend,” analysts at London-based Economist Intelligence Unit (EIU) wrote in the outlook report on Kenya.
“In the event of drought, especially during the main wet season in March-May, our forecast for 2022 would be revised upwards.”
The Kenya Meteorological Department in February forecast adequate rainfall in the March-April-May long rains season, pointing to improved farm harvest and production in food which accounts for a third of the consumer price index.
A depreciating shilling, which has crossed the 114 levels against the globally strengthening US dollar, usually exerts upward pressure on the cost of goods and services in Kenya which is the net import economy.
“This year, inflation is expected to remain elevated and currency weakness—amid persistent capital outflows, an erosion of foreign exchange reserves and a stronger US dollar—poses an upside risk to the forecast,” analysts FocusEconomics, the compilers of the forecast from the top global firms, wrote in the March outlook on Kenya.
“The currency is forecast to depreciate further this year on the back of election-related uncertainty, a wide current account deficit and eroded foreign-exchange reserves.”
Without the impact of the Russia-Ukraine war, 13 of the 14 firms are projecting that inflation will not breach the government’s upper target of 7.5 percent which was last exceeded in 2017 when inflation averaged 8.0 percent.
The exception is Oxford Economics which has forecast inflation to rise to 7.7 percent.