High food and fuel prices intensify pace of inflation

A steep rise in food and energy prices pushed inflation to its highest level since the new measure was introduced last February.

Data from the Kenya National Bureau of Statistics (KNBS) indicates that inflation rose to 15.53 per cent in July from 14.49 per cent in June. This is way above the Central Bank of Kenya target of five per cent.

As the cost of energy remains volatile and poor weather exerts pressure on food prices, inflation is expected to stay in the double digit zone but lower than the current level.

The agency blamed the rising cost of living measure on the ongoing surge in the prices of transport, food and electricity.

“This is attributed to cost increases recorded in respect of maize flour, maize grain, sugar and rice,” said the bureau in a statement. “The price of a meal of chips and chicken went up by 8.19 per cent while that of ugali, nyama (meat) went up by 3.94 per cent during the review period.”

Staple food

Poor weather has reduced the supply of sugar and maize, the country’s staple food, to the market that has seen the cost of maize flour more than double since December.

The two-kilogramme packet of maize flour retailed at Sh136 from Sh130 in June and Sh70 in December, but the prices are expected to start falling from September as the country enters the harvest season.

Fuel prices have soared above the Sh100 a litre trailing the rise in crude. The weak Kenya shilling against the dollar, has made the cost of imported commodities expensive.

The shilling has shed 13 per cent to the dollar over the past month to settle at Sh91.10 to the greenback at the close of trade Monday.

The cost of electricity is also expected to continue rising as the country taps deeper into expensive thermal power to meet its energy needs. This is due to the drop in supply from the cheaper hydro power.

The fuel cost adjustment — a varying item on electricity bills that is linked to the amount of power that is generated from the expensive thermal sources — has risen to highest level ever.

It stands at Sh8 a unit of power for bills that will be settled next month up from Sh3.82 in January. It is expected to rise further with increase in use of fuel generators to roll back the ongoing power rationing.

“I think inflationary pressure of food should begin to fall over the next few months through the end of the year as harvest comes in and maize imports arrive,” said Robert Bunyi, an analyst at Mavuno Capital. “But there may be other pressures from the depreciated shilling, which is basically imported inflation.”

Central Bank of Kenya reckons that the prices of food and fuel will influence the direction of the cost of living measure.

“We don’t know whether inflation has peaked at 15.5 per cent because of the supply side shocks,” said Njuguna Ndung’u, the Central Bank governor and the chairman of MPC. “We need to see an improvement in supply such as that of food items to know whether we have peaked.” He added: “While there is an upward trend in the cost of non-food and non-fuel items, the rate of inflation of this group remained within the five per cent target.”

The double digit inflation is set to slow down the economic growth on reduced demand for goods and services and less activity in the agricultural front, which is the largest employers and leading contributor to the county’s wealth.

It will eat deep into the savings of the high income Kenyans while the lower earners are cutting their expenditure on basic commodities — a move that will deny manufacturers new demand they need to boost production and offer them room to create new jobs.

The economy is expected to grow by six per cent this year up from about 5.6 per cent in 2010.

The scheduled three-hour power rationing and demand for food to supply victims of famine in neighbouring Somalia and parts of Kenya could yet add more bumps in the growth outlook.

Source: www.businessdailyafrica.com

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