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3rd Jan 2012
Consumers could soon experience a substantial reduction in the cost of living if inflation data released last week by Kenya National Bureau of Statistics is anything to go by.
But market observers reckon it could take long before reduction of maize flour, rice, wheat flour, cooking oil, vegetables or meat prices.
This is because importers and local manufacturers are still holding on to old stocks (or supplies), which they acquired or produced at higher costs.
Also keenly watched will be prices of essentials such as diesel, petrol and kerosene.
"We do not expect an exponential drop in the cost of living this month because of the two to three months time lag before effects of a stronger shilling and lower fuel prices kicks into the system," said George Bodo, an analyst at ApexAfrica Capital Limited.
In the last few weeks, the Shilling has been firming up against the US Dollar as effects of a tight monetary policy stance by the Central Bank of Kenya (CBK), take its toll on the credit market.
"We expect the Shilling to strengthen further, to about Sh80 to the dollar level before Central Bank of Kenya holds its next monetary policy meeting," said Bodo.
The shilling has been strengthening from a low of Sh107 to the dollar it hit in October last year after CBK aggressively pushed up the CBR rate by 11 per cent to 18 per cent in December.
Inflation target
Some analysts said CBK was likely to leave rates on hold at the next meeting on January 11 to give its monetary tightening policy more time to cool inflationary pressure stemming from rapid credit growth.
"We believe that the inflation rate has now peaked and will come down fairly rapidly in the first half of this year, comfortably returning to single digits by mid-year as targeted by the central bank," said Mark Bohlund, senior economist for Sub-Sahara Africa at IHS Global Insight.
"However ... a swift rollback of the monetary tightening over recent months would carry risks to the CBKs medium-term inflation target of five per cent."
For the better part of last year, prices of essential goods and services had been on a steady rise, making life expensive for many households.
"We expect the cost of living to come down this year. This is because of the impact of current developments including strengthening of the shilling and lower fuel prices. While consumer price index might fall this month, the effect will not be reflected in peoples pockets for the next one or two months," said Patrick Obath, chairman, Kenya Private Sector Alliance.
The December inflation report showed inflation rate slowed year on year in December to 18.93 for the first time since October 2010.
Consumer prices rose 0.74 per cent from November, down from a 1.52 per cent rise a month earlier. While prices rose in all sectors of the consumer price basket, the pace of the increases slowed.
"It is not surprising because we have seen the rains, which has led to a slowdown in food prices, while the reduction of oil prices was expected to have an impact," Dickson Magecha, a trader at Standard Chartered, said.
"We expect a much bigger drop in coming months as imported inflation will come down with foreign exchange stability."
The slide of the shilling earlier this year against the dollar amplified global increases in fuel prices and other import costs, feeding through to higher inflation rates.
The cost of food was also driven higher earlier in the year after drought hit locally-grown supplies, but sustained rains towards the end of last year have raised hopes harvests will be better and bring down prices of basic commodities.
Retail price
In November last year, inflation rate was at 19.72 per cent, an increase from 18.91 per cent the previous month (October). In November 2010 it stood at 3.84 per cent.
The average price of a kilogramme of beef was Sh255 in November 2010, Sh309.85 in November last year.
Also rising by similar margins was the retail price of milk, cooking fat, cooking gas, kerosene and charcoal. A higher fuel cost adjustment as well as a weakening shilling has ensured that cost of electricity remained high for the most part of the year.
Signs of a spike in the cost of living first became evident in January last year. This was when effects of a persistent drought begun to affect food supplies. What followed this was political unrest in the Middle East, severely disrupting oil supplies into the country.
The economic situation became worse as foreign investors fled the market in response to the debt crisis in Greece and the Eurozone.
"While the macroeconomic environment has been deteriorating, CBK has been slow in taking drastic policy measures. We expect inflationary pressure to get worse before it can get better," said John Kirimi, Sterling Investment Bank managing director.
Reuters
Consumers could soon experience a substantial reduction in the cost of living if inflation data released last week by Kenya National Bureau of Statistics is anything to go by.
But market observers reckon it could take long before reduction of maize flour, rice, wheat flour, cooking oil, vegetables or meat prices.
This is because importers and local manufacturers are still holding on to old stocks (or supplies), which they acquired or produced at higher costs.
Also keenly watched will be prices of essentials such as diesel, petrol and kerosene.
"We do not expect an exponential drop in the cost of living this month because of the two to three months time lag before effects of a stronger shilling and lower fuel prices kicks into the system," said George Bodo, an analyst at ApexAfrica Capital Limited.
In the last few weeks, the Shilling has been firming up against the US Dollar as effects of a tight monetary policy stance by the Central Bank of Kenya (CBK), take its toll on the credit market.
"We expect the Shilling to strengthen further, to about Sh80 to the dollar level before Central Bank of Kenya holds its next monetary policy meeting," said Bodo.
The shilling has been strengthening from a low of Sh107 to the dollar it hit in October last year after CBK aggressively pushed up the CBR rate by 11 per cent to 18 per cent in December.
Inflation target
Some analysts said CBK was likely to leave rates on hold at the next meeting on January 11 to give its monetary tightening policy more time to cool inflationary pressure stemming from rapid credit growth.
"We believe that the inflation rate has now peaked and will come down fairly rapidly in the first half of this year, comfortably returning to single digits by mid-year as targeted by the central bank," said Mark Bohlund, senior economist for Sub-Sahara Africa at IHS Global Insight.
"However ... a swift rollback of the monetary tightening over recent months would carry risks to the CBKs medium-term inflation target of five per cent."
For the better part of last year, prices of essential goods and services had been on a steady rise, making life expensive for many households.
"We expect the cost of living to come down this year. This is because of the impact of current developments including strengthening of the shilling and lower fuel prices. While consumer price index might fall this month, the effect will not be reflected in peoples pockets for the next one or two months," said Patrick Obath, chairman, Kenya Private Sector Alliance.
The December inflation report showed inflation rate slowed year on year in December to 18.93 for the first time since October 2010.
Consumer prices rose 0.74 per cent from November, down from a 1.52 per cent rise a month earlier. While prices rose in all sectors of the consumer price basket, the pace of the increases slowed.
"It is not surprising because we have seen the rains, which has led to a slowdown in food prices, while the reduction of oil prices was expected to have an impact," Dickson Magecha, a trader at Standard Chartered, said.
"We expect a much bigger drop in coming months as imported inflation will come down with foreign exchange stability."
The slide of the shilling earlier this year against the dollar amplified global increases in fuel prices and other import costs, feeding through to higher inflation rates.
The cost of food was also driven higher earlier in the year after drought hit locally-grown supplies, but sustained rains towards the end of last year have raised hopes harvests will be better and bring down prices of basic commodities.
Retail price
In November last year, inflation rate was at 19.72 per cent, an increase from 18.91 per cent the previous month (October). In November 2010 it stood at 3.84 per cent.
The average price of a kilogramme of beef was Sh255 in November 2010, Sh309.85 in November last year.
Also rising by similar margins was the retail price of milk, cooking fat, cooking gas, kerosene and charcoal. A higher fuel cost adjustment as well as a weakening shilling has ensured that cost of electricity remained high for the most part of the year.
Signs of a spike in the cost of living first became evident in January last year. This was when effects of a persistent drought begun to affect food supplies. What followed this was political unrest in the Middle East, severely disrupting oil supplies into the country.
The economic situation became worse as foreign investors fled the market in response to the debt crisis in Greece and the Eurozone.
"While the macroeconomic environment has been deteriorating, CBK has been slow in taking drastic policy measures. We expect inflationary pressure to get worse before it can get better," said John Kirimi, Sterling Investment Bank managing director.
Reuters
