Boosting productivity best way to resolve Kenya’s inflation problem


Inflation continues to play out in different ways across different markets. PHOTO | POOL

Inflation continues to play out in different ways across different markets. In the US, the UK and across the eurozone, inflation is on a downward trend.

The opposite is true in some parts of Africa where rising prices are complicating household budgets. In Nigeria, for example, inflation has surged to 27.33 percent on the back of higher food prices, while Kenya’s consumer price index edged up to 6.9 percent.

There needs to be a deeper reflection on the long-term cure for inflation. The solution should go beyond the customary interest-rate increases that only serve to create a drag on economic growth.

To start with, there is much that Kenya can draw from its global counterparts when it comes to inflation computation. In the US, housing costs are heavily weighted in calculations.

The price index tracks a range of items, including rents, hotel rates and household insurance.

Home sale prices are not included. But the index also factors in a hypothetical figure called “owners’ equivalent rent”, meant to measure what homeowners would have to pay to rent a similar place.

In Kenya, housing costs are bundled with other costs such as water, electricity and gas and even then, the total weighting given to this category is only 14.6 percent.

Kenya can also borrow a leaf from Nigeria, which breaks down its inflation computation into regional analysis. For example, in its latest print, Kogi state had the highest food prices with a food inflation rate at 41.74 percent, followed by Kwara at 38.48 percent. Such granularity can also help Kenya broaden its policy options through more targeted interventions.

While improving the computation techniques for inflation can only help us achieve a better understanding of the extent to which purchasing power is eroded, the real work that needs to be done is in unlocking productivity gains across the economy.

Why does Kenya import 95 percent of its wheat when it has thousands of acres of idle land? Why is it held hostage by fossil fuel prices while renewable energy could power many of our industries? These are only a few examples of areas that could easily ramp up our productivity levels.

The writer is Chief Economist at Mentoria Economics.