Kenya’s producer prices rise above Covid era levels

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Raw material costs rose twice as fast as consumer inflation last year in the wake of Russia’s war in Ukraine, a weakening shilling and the worst drought in 40 years.

The producer price index (PPI), which tracks the prices businesses receive for their goods and services, rose to an average of 15 percent last year from 7.4 percent in 2021 and 0.14 percent during the peak of Covid-19 economic hardships in 2020, says the Kenya National Bureau of Statistics (KNBS).

It rose faster than consumer inflation that averaged 7.6 percent last year, triggering a squeeze in household demand for goods, in particular non-essential goods.

Energy costs, including that of fuel and electricity, were the main driver of the upward trend in producer prices. The war in Ukraine has sparked a major shock on commodity markets after disrupting the production and trade of several commodities.

This mainly affected goods which Russia and Ukraine are key exporters of, including energy, fertilisers, and grains. These price increases come on top of already tight commodity markets due to a solid demand recovery from the Covid-19 disruptions, as well as numerous pandemic-related supply constraints.

In Kenya, the weakening of the shilling against the dollar means that importers of raw materials, including machinery, require more of the local currency for shipments.

The shilling was on Thursday exchanged at an average of Sh133.59 units to the dollar, having depreciated from Sh104.44 at the end of March 2020.

Commercial banks also ran out of dollars on some days following a shortage of the US currency, making it difficult for manufacturers and importers of general goods to meet their obligations.

Kenyan private sector business activity contracted in March, albeit at a slower pace than a month earlier, hurt by the rising prices, a weakening shilling and a lack of access to dollars, a recent survey showed.

The Stanbic Bank Kenya Purchasing Managers' Index (PMI) rose to 49.2 in March from 46.6 a month earlier, but remained below the 50 mark that denotes growth in business activity.

Thirty percent of respondents in the survey cited difficulty in getting hold of dollars as well as increased taxes and higher fuel prices that led to a rise in purchase prices.

"The latest contractions in output and sales were centered on wholesale and retail companies. By contrast, manufacturing, agriculture, construction and services recorded expansions," Stanbic Bank said in comments accompanying the survey.

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