Alarm as cost of living rises to 26-month high

Foodstuff in a market. The cost of living rose to a 26-month high in August, on the back of increases in the prices of fuel and food items. FILEPHOTO | NATION MEDIA GROUP 

In Summary

• “While the drivers of inflation are mostly on the supply-side — and related to poor rains and the pressure on food prices — foreign exchange volatility, strong credit growth trends, and a gradual recovery in economic performance risk second-round effects becoming more entrenched,” said Ms Razia Khan, the managing director of Global Research at Standard Chartered Bank.
• “Room for any interest rate easing — even much more of a downward drift in short-term market rates — is limited.  With the CBR at 8.5 per cent, there is room for a modest rise in the policy rate by year-end,” Ms Khan noted.

By JOSHUA MASINDE
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The cost of living rose to a 26-month high in August, on the back of increases in the prices of fuel and food items.

Data released by the Kenya National Bureau of Statistics (KNBS) Monday shows that inflation for the month increased to 8.36 per cent, compared to 7.67 per cent in July. This is the highest level since June 2012, when the figure stood at 10.05 per cent.

Between July and August 2014, the Food and Non-Alcoholic Drinks Index rose the most, by 1.75 per cent, pushing up the price of basic food commodities such as fresh packeted and unpacketed milk and maize, as the impact of poor rains continues to be felt. Tomato prices in the period also remained high.

AGGREGATE RISE
“This aggregate rise in the rate of food inflation came as a result of increases in the prices of several food commodities, outweighing some notable falls in the prices of other food items,” KNBS said in the report.

A poor rainfall pattern much of this year has negatively affected agriculture, creating a ripple effect on the price of food.

“While the drivers of inflation are mostly on the supply-side — and related to poor rains and the pressure on food prices — foreign exchange volatility, strong credit growth trends, and a gradual recovery in economic performance risk second-round effects becoming more entrenched,” said Ms Razia Khan, the managing director of Global Research at Standard Chartered Bank.

Inadequate rainfall saw agriculture, the backbone of the economy, perform dismally in the first quarter of the year. This slowed down GDP growth to 4.1 per cent, from 5.2 per cent in the first quarter period of last year.

Over the same period of July and August, the Housing, Water, Electricity, Gas and Other Fuels Index rose by 0.32 per cent due to an increase in fuel and house rent.

The recent revision of power tariffs also pushed up electricity charges in August, compared to a similar period in 2013. The high cost of petrol, public transport and air travel fares also pushed up the cost of transport.

With the inflation level now above the government’s estimate of 7.5 per cent, the cost of credit may remain high despite on-going efforts and campaigns to lower the cost of loans.
LIMITED ROOM

“Room for any interest rate easing — even much more of a downward drift in short-term market rates — is limited.  With the CBR at 8.5 per cent, there is room for a modest rise in the policy rate by year-end,” Ms Khan noted.

Inflation first broke the government’s upper limit of 7.5 per cent in July, when it stood at 7.67 per cent. The government had set a medium term inflation target of five per cent, with an upside or downside of 2.5 per cent.

Ms Khan forecasts a 0.5 per cent increase in the CBR to nine per cent in December, despite government efforts to maintain an accommodative interest rate environment so as to drive down the cost of credit and stimulate lending.