Inflation spirals upwards

March 30, 2011

, NAIROBI, Kenya, Mar 30 – The country\’s inflation in the month of March has risen to 9.2 percent from the 6.5 percent recorded in February on account of an increase in food prices and transportation costs.

Statistics from the Kenya National Bureau of Statistics shows that the Food and Non Alcoholic drinks\’ index went up by 3.92 percent between the months of February and March driven by a rise in products such as potatoes, sukuma wiki, beef and maize grain.

High international crude oil prices were also reflected in the costs of petrol and bus fares.

"The Transport index rose by 2.36 percent, mainly due to increased costs of petrol and matatu fares. The prices of these items went up by 4.42 and 9.20 percent, respectively, between the months of February and March 2011," the data released on Wednesday showed.

The high energy costs were also mirrored in the Housing, Water, Electricity, Gas and Other fuels\’ index which also rose by 1.56 percent in the period under review due to an increase in electricity and house rents.

During the month, fuel cost charge which is the main component in the electricity bill rose from Sh4.67 per Kilowatt hour (Kwh) in February to Sh5.73 per Kwh.

Inflation has been creeping up in the last five months due to the dry spell that the country has experience since late last year and the political unrest in the Middle East and North Africa that have affected oil production.

Economist Razia Khan said the surge in the Consumer Price Indices (CPI) did not come as a big surprise given the sustained pressure on food and fuel prices and a weak shilling.

However, she said there was a likelihood that inflation would hit the double digit growth which will be above the government\’s target rate of five percent.
"The \’shock value\’ of the rise is immense, with the lagged effect of price pressures suggesting that Kenya will almost certainly achieve double-digit inflation this year. The speed of pass-through from first order external shocks has surprised with its rapidity," the Standard Chartered Head of Regional Research for Africa said.

Coming at a time when the Central Bank of Kenya has just raised the benchmark policy rate to six percent to cushion the economy from the persistent shocks of drought and high oil prices, Ms Khan reckoned that the March CPI release will pile up pressure on the Central Bank to act.

"Having seen a token 25bps rise in the bank rate, reversing the move earlier this year, there will now be considerable expectation that the CBK will have to tighten more – if not to ensure positive real interest rates, then at least to prevent real rates from becoming even more negative," she forecasted.

From a supply-side shock, the analyst acknowledged that this would be a difficult policy decision for the authorities.

"The foreign exchange rate will be a key concern and more tightening may well be needed to ensure relative currency stability," she said.

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