Analysts have tipped inflation to fall below the preferred central bank range following the significant fall in fuel prices this month.
The Energy Regulatory Commission (ERC) cut the Nairobi price of a litre of petrol by Sh9.33 to Sh104.21 in the mid-January review Monday, while a litre of diesel is now retailing Sh10.04 lower at Sh102.24.
The price of kerosene, which is mainly used as a household energy fuel, was cut by Sh3.52 a litre to Sh101.70.
In the inflation basket, petroleum prices have a direct effect on the transport and utility baskets, which together with housing have a combined weight of 26.96 on the basket of goods and services used to track the cost of living.
The cost of transport also has a significant effect on the movement of food price, which has the largest weight on the inflation basket at 36.04.
“The immediate effect on transport and subsequently on general commodity prices should see inflation drop below five percent in the first quarter of 2019,” said Commercial Bank of Africa in a fixed income note.
In December, inflation stood at 5.71 per cent—a 14-month high – attributed to price and fare increases during the festive season.
For CBK, the preferred range for rise in cost of living is between 2.5 and 7.5 per cent.
Analysts at Genghis Capital said fuel inflation, which had gone up significantly partly due to the introduction of eight percent VAT last September, should track back towards single digits as a result of the price cut.
“We estimate the net effect will be a reduction in fuel inflation from 13.8 percent year-on-year in December to about 10 percent this month,” said Genghis in a market note.
A stable shilling is also likely to help keep price increases in check, especially for imported goods.
Following a wobble in the first week of the year, the shilling has settled back in the 101.50-102.00 range against the dollar, even as the market remains liquid.
Analysts have pointed to support from dollar inflows from diaspora remittances, agriculture exports and portfolio investors, while the regulator has also stepped in to mop up liquidity through the repo market.