VAT effect helps September inflation rate fall to 6.6pc

Money Markets

The latest inflation data from the Kenya National Bureau of Statistics shows that the cost of food and transport continues to be the key drivers of the rising cost of living. PHOTO | FILE | NATION MEDIA GROUP 

By CHARLES MWANIKI, cmwaniki@ke.nationmedia.com

In Summary

• Economic analysts predict that the inflation rate could soon return to its year-on-year uptrend, that had seen a steady rise in five straight months from March.
• The latest inflation data from the Kenya National Bureau of Statistics shows that the cost of food and transport continues to be the key drivers of the rising cost of living.

The rate of change in prices of goods and services dropped by nearly two percentage points to 6.6 per cent in September, helped by the fall from a higher base in September 2013 when an increase in value added tax (VAT) took effect.

Inflation has now fallen below Treasury’s upper target of 7.5 per cent, easing pressure on policy makers to raise interest rates. Economic analysts, however, predict that the inflation rate could soon return to its year-on-year uptrend, that had seen a steady rise in five straight months from March.

The latest inflation data from the Kenya National Bureau of Statistics shows that the cost of food and transport continues to be the key drivers of the rising cost of living.

READ: Flour, power and fuel price cuts offer homes reprieve

Year-on-year cost of food and non-alcoholic beverages has gone up by 8.4 per cent, while that of transport is up 10.34 per cent. Month-on-month increases in food cost stands at 0.58 per cent between August and September 2014.

“The aggregate rise resulted from observed increases in the prices of several food commodities outweighing notable falls in the prices of others,” said KNBS in a statement.

There was respite, however, in cost of housing, water, electricity, gas and other fuels, which reduced by 0.52 per cent compared to August due to notable falls in the price of kerosene and electricity.

Electricity users saw lower fuel and forex adjustment costs in September due to a mixture of cheaper fuel and injection of additional geothermal power into the grid at the expense of thermal power.

Lower pump prices for petrol and diesel in September meant that transport costs decreased by 0.41 per cent compared to August.

READ: Price of petroleum products down by biggest margin since 2012
In September 2013, Kenya’s year-on-year inflation rose to 8.29 per cent to a 15-month high after prices of nearly all items went up on revision of the VAT law that taxed most goods.

Standard Chartered head of research for Africa Razia Khan, in an outlook on Kenya’s inflation issued at the beginning of the month, said that the impact of this base-effect-related reduction will likely be temporary.

“While the drivers of inflation are mostly supply-side for the moment – 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 Khan. 

She noted that there remains room for a moderate rise in the policy rate of 8.5 per cent by the end of the year.

Policy makers at the Central Bank and the Treasury will be watching with interest the inflation trend in the next few months, with an eye on how the cost of goods and services will affect interest rates.