Inflation rises to 27-month high as spending drops

Customers shopping at a local supermarket. FILE PHOTO | NMG

By CONSTANT MUNDA More by this Author

Kenya’s inflation hit a 27-month high in May on the back of a jump in the price of essential items like cooking oil, food, fuel and soap, squeezing household budgets and demand for goods and services.

The cost of living measure rose to 7.1 percent in May from 6.5 percent the prior month, the Kenya National Bureau of Statistics (KNBS) reported on Tuesday.

This is the highest jump in inflation since February 2020 when it stood at 7.2 percent, prompting the Central Bank of Kenya (CBK) to warn that the measure risked rising above the government’s target range of 2.5-7.5 percent.

This has forced many households, especially in the low-income segment, to reduce their shopping basket in an environment where firms have frozen salaries as they recover from Covid-19 economic hardships.

The rise in the cost of essential commodities has forced workers to cut back spending on non-essential items such as beer and airtime, ultimately hurting firms like East Africa Breweries Limited (EABL) and Safaricom.

“The rise in inflation was mainly due to increase in prices of commodities under food and non-alcoholic beverages (12.4 per cent); furnishings, household equipment and routine household maintenance (7.9 per cent); transport (6.4 per cent) and housing, water, electricity, gas and other fuels (6.0 per cent) between May 2021 and May 2022,” KNBS managing director Macdonald Obudho said in a statement.

The central bank on Tuesday warned of a “clear and present danger” of inflation rising above the upper limit of 7.5 percent in the coming months, the first breach since August 2017 when it climbed to 8.04 percent.

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Inflation in most countries has soared to multi-year highs, driven by a rebound in economic activity and a further straining of rampant supply chain disruptions that has made energy and food costly.

Supply chain disruptions and their impact on inflation remain largely out of central banks’ control, yet many have begun withdrawing ultra-loose monetary policy to control soaring inflation.

The CBK’s inflation-targeting Monetary Policy Committee (MPC) on Monday raised the benchmark central bank rate (CBR) — a signal for direction in interest rates — to 7.5 percent from 7.0 percent where it had been stuck since April 2020.

“We will take all measures necessary to deal with inflation. But it is clear that on supply side-driven inflation [growth in cost of commodities], there’s virtually nothing that monetary policy can do. What monetary policy does is to deal with second-round effects,” CBK Governor Patrick Njoroge said yesterday.

“Even then, we understand that this [rise in CBR] is not totally effective. That will need some time, say about three months, to be completely embedded in the economy.”

Costly commodities have hit workers hard given that the average real wages, adjusted for inflation, stood at negative 3.83 percent last year compared to negative 0.59 percent in 2020.

Employers say the real wages will take longer to improve amid the recovery of the economy from Covid-19 economic hardships, which delivered layoffs, pay cuts and business closures.

Kenya’s private sector has also been hit by the rising cost of living measure.

The private sector activity fell in April, hurt by rising consumer inflation and supply shortfalls for some goods.

The S&P Global Kenya Purchasing Managers’ Index (PMI) dropped to 49.5 from 50.5 a month earlier. The 50.0 mark separates growth in activity from contractions.

The survey indicated that due to the higher inflation, customer demand had in turn slowed.

“Domestic demand fell, driven by reduced client spending following significant increases in food and fuel prices,” Kuria Kamau, Fixed Income and Currency Strategist at Stanbic Bank, said.

The KNBS data shows cooking oil and fat jumped at the highest rate of 47.09 percent to an average of Sh370.71 in May from Sh252.03 a year ago.

It was followed by wheat flour of which a two-kilogramme packet averaged Sh165.89 -- a 28.45 percent rise over the prior year -- while staple maize flour of a similar quantity sold at 23.80 percent higher at Sh148.57 on average.

The KNBS data further indicates an 800-gramme bar soap averaged Sh153.67, a 25.92 percent jump over Sh129.15 a year ago.

ALSO READ: Central Bank raises interest rate to tame inflation

Households paid 21.49 percent more for a litre of diesel — largely used in farming and transportation — to Sh131.91 compared with last year, while petrol is 18.65 percent higher to Sh150.94 per litre on average.

Other commodities whose prices has risen significantly are milk, with a 500 millilitre packet costing 16.32 percent more at Sh57.30, spinach (12.35 percent more at Sh69.86 a kilo) and beef (Sh513.07 a kilo on average, a growth 9.11 percent year-on-year).

“With rains, we expect that fast-growing crops like Sukuma Wiki, tomatoes and even potatoes will come to the market and therefore exert a downward pressure on food prices and inflation,” Dr Njoroge said.

The rising prices of most commodities are largely a result of rising global costs due to persistent supply chain disruption.

For example, the UN Food and Agriculture Organisation’s food index shows the cost of edible vegetable oils such as crude palm oil, sunflower, soybean and corn oil—used in manufacture of cooking oil and soaps—jumped on average 27.8 percent between January and May this year, adding to 36.1 percent rise last year.

Other commodities whose global prices have jumped further between January and May are wheat (52.9 percent) and Murban oil (27.3 percent), according to the UN.

cmunda@ke.nationmedia.com