Costly food seen piling pressure on inflation

Business Reporter

Nation Media Group

What you need to know:

The end of a subsidy plan on maize flour, as well as the potential rise in power bills to recover fuel costs from last year, is likely to renew upward pressure on headline inflation which had fallen to 4.5 per cent in December.

Kenya’s inflation is likely to test the upper preferred limit of 7.5 per cent this year due to higher food and energy costs, an investment bank has said in its outlook for the year.

Analysts at NIC Securities say the end of a subsidy plan on maize flour, as well as the potential rise in power bills to recover fuel costs from last year, is likely to renew upward pressure on headline inflation which had fallen to 4.5 per cent in December.

“These two adjustments are significant enough in our view to push inflation to above the upper bound inflation target for the CBK of 7.5 per cent.

A favourable weather outlook for 2018 together with the average rainfall received in late 2017, however, provides some reprieve with a good harvest season expected in 2018,” said NIC Securities head of research Timothy Wambu in the firm’s outlook report.

Fuel costs have also gone up with a litre of petrol and diesel now retailing at the highest level in 38 months. Higher transport costs tend to filter through to all other sectors of the economy.

Analysts at Dyer & Blair Investment Bank, however, say that at least in the first quarter of this year, inflation is likely to remain contained within the preferred five per cent plus or minus 2.5 percentage points given improved harvests in the last quarter of last year.

READ: Why cost of living will remain high for months

In subsequent months, Dyer says, the direction of inflation will be determined largely by whether this year’s long rains are sufficient.

“Beyond the first quarter of the year, we believe that the performance of the long rains will be more instructive of expected inflation for the rest of year. Demand pressures are expected to remain muted keeping the non-food-non-fuel inflation below five per cent,” said Dyer in macroeconomic outlook for 2018.

Central Bank of Kenya (CBK) has taken a sanguine view on inflation, saying in its Monetary Policy Committee brief on Monday that it expects prices to remain within range in the near term despite the expected upward pressure from the rise in international oil prices.