Unpredictable food prices, however, to determine how fast the cost of living will drop
Kenya’s inflation is likely to fall further in the first half of 2018—if prices are compared with the abnormally high increase seen in a similar period this year—but forecasting price trends by policymakers will be complicated by unpredictable food prices.
Citi Africa economist David Cowan says in the lender’s latest weekly economic note that the steep drop in inflation in the last six months has surprised the market.
In June, economists were projecting this year’s average inflation to be 9.2 per cent, but it is now likely to end up below eight per cent.
Kenya’s headline inflation fell to 4.73 per cent last month compared to 5.72 per cent in October, putting it on the lower band of CBK’s preferred range of five per cent, plus or minus 2.5 percentage points.
It had hit a five-year high of 11.7 per cent in May, before easing on improving crop yields that have seen food inflation fall from 20 per cent in May to only 5.8 per cent in November.
“Assuming that inflation returns to more normal historical trends, base effects would mean that inflation falls to very low levels in the first half of 2018, before rising back to more normal levels in the second half,” said Mr Cowan.
“But as was the case this year, the wildcard could well be food price inflation, notably from Ethiopia. If these feed into higher Kenyan inflation than historical trends indicate, then inflation may not fall as significantly as we currently are forecasting.”
Economists at Commercial Bank Africa (CBA) warn that there is also a risk of demand pressure on prices once the economy recovers after a difficult 2017 that was characterised by drought and political noise.
“The expected rebound in economic activity risks exerting an upward pressure on domestic prices through increased aggregate demand while rising fuel prices could apply an upward pressure on transport and electricity prices raising the cost of production in key sectors of the economy,” said CBA in their December monthly economic report.
“Nevertheless, the stable Kenya shilling and ensuing base effects could support headline inflation around the Central Bank’s medium-term target of five per cent.”
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