Core inflation jumps to three-year high

Inflation slows for the first time in 9 months amid CBK rate hikes. PHOTO | POOL

Inflation on goods and services outside of food and fuel rose to a 36-month high of 3.2 percent in August, reflecting the second round effects of persistently higher input prices across the economy.

This non-food-non-fuel inflation, otherwise known as core inflation, tends to be less elastic compared to headline inflation which is largely influenced by the volatile change in food and fuel prices.

It was last above the August threshold in July 2019 at 3.3 percent, with the rise set to be a concern for the Central Bank of Kenya (CBK) when it holds its monetary policy committee meeting later this month.

Analysts expect therefore that the CBK will come under pressure to tighten its monetary policy stance further either in the September MPC meeting or the one to follow in November if core inflation does not ease.

“This suggests that second-round price pressures are becoming more broad-based. The question now is whether the tenacious rise in inflation is sufficient to nudge the CBK to resume its monetary policy tightening cycle following the ‘pause’ in its last meeting,” economists at NCBA said in a note on August inflation.

“However, with negative local and external reverberations choking off the economic momentum, containing price pressures whilst also remaining supportive of the economy will involve delicate and difficult policy choices. Nonetheless, we see the CBK having scope to raise its policy rate (CBR) by at least 75 basis points before the end of 2022.”

CBK is normally able to ride out oscillations in the headline inflation—which rose to a 62-month high of 8.5 percent in August—due to the transitory nature of food and fuel price increases that tend to normalise before passing through to the other sectors of the economy.

Food, fuel and utilities account for 48 percent of the inflation basket, hence their oversized influence on the headline inflation rate.

An increase in core inflation also points to deeper price issues in the economy, and that the rise in the primary products is filtering through to other segments such as transport, healthcare, recreation and education services.

The CBK has also had to contend with a weakening shilling against the dollar, which has raised the cost of imports into the country significantly, both for consumer and capital goods for the manufacturing sector.

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