Capital Markets

Producer inflation hits highest points since 2019

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Youth Affairs, Sports and Arts Cabinet Secretary Ababu Namwamba with Kenya Association of Manufacturers (KAM) chairman Rajan Shah and Head of German Development Corporation at the German Embassy Daniel Guenther. PHOTO | DIANA NGILA | NMG

A sharp increase in producer inflation, which measures the price movement of manufactured goods before they are dispatched to retailers, has hit a three-year high as players grapple with supply disruptions and the effects of a global economic slowdown.

Data from the Kenya National Bureau of Statistics (KNBS) indicates that the cost of manufacturing as measured by the Producer Price Index (PPI) hit 16.53 per cent in June before easing to 15.78 per cent in September but remained the highest since 2019 September when the inflation rate stood at 1.40 per cent.

The high cost of PPI was passed to consumers by the manufacturers as they sought to recoup the additional cost incurred in production.

This resulted in prices of consumer goods such as edible cooking oil, wheat and maize flour rising to historic levels.

“The third quarter year-on-year producer inflation was 15.78 per cent in September 2022 compared to 7.72 per cent in September 2021,” said KNBS in a report.

PPI, which is a key economic number in developed economies captures price movement ahead of retail and is an early indicator of inflation.

In the period to September, the mining and quarrying sector recorded the highest price increase at four per cent followed by manufacturing and water supply at 17.7 and 2.1 per cent respectively.

However, there was a relief in electricity as the cost dropped by 6.9 per cent, according to KNBS.

READ: Manufacturers' costs dilemma

The sharp increase in production cost in the second quarter of 2022 was attributed to the Russian-Ukraine war, which hit the prices of raw materials and led to a sharp jump in freight charges.

Seaports along the Black Sea, a major trade corridor, were opened in August after the United Nations and Russia reached a deal, leading to an easing of freight charges and the cost of raw materials, especially grains such as wheat.

After the opening of the corridor, the price of wheat declined to a low of $365 a tonne from a high of $540 in April when the war was at its peak.

Russia invaded Ukraine towards the end of February with the effects of the war felt in the second quarter.

The Kenya Association of Manufacturers (KAM) says the minimum wage introduced in May and high logistics costs have also had an impact on the cost of production locally.

“The freight charges at both international and local markets have remained high and the effects of the minimum wages are now being felt in the second half of the year. These, among other factors, have had an impact on the rising cost of production,” said Rajan Shah, chairman of KAM.

The government set the minimum wage for this year at between Sh8,109.90- Sh34,302.75 per month, up from Sh7,240.96 to Sh30,627.45.

Mr Shah said the increased cost of freight charges locally has been occasioned by the high cost of fuel, especially diesel, which is heavily used in the transport sector and has remained high for the better part of the year.

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Though the price of fuel has declined marginally in the last two months, they have remained high at Sh136 a litre (diesel) on average when compared with a year ago when it was at Sh107.

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