Food and fuel prices push Kenya’s inflation up as Uganda’s eases back

Saturday August 6 2016

The rising prices of fuel, sugar, maize and

The rising prices of fuel, sugar, maize and other agricultural produce such as tomatoes have in the past three months driven inflation in Kenya to 6.39 per cent — the highest in the region — as Uganda recorded a drop in the cost of living. TEA GRAPHIC 


The rising prices of fuel, sugar, maize and other agricultural produce such as tomatoes have in the past three months driven inflation in Kenya to 6.39 per cent — the highest in the region — as Uganda recorded a drop in the cost of living.

The rebound in the prices of crude oil on the international market, which has seen it rise from a low of $29 per barrel early this year to the current $41.91 per barrel, is partly responsible for the upward spike in the medium term in Uganda, Tanzania and Rwanda, as the countries start adjusting their pump prices upwards.

The rise in prices of food items that make up close to 40 per cent of the basket of goods used to calculate inflation saw Kenya’s inflation rise from 5.8 per cent in June to 6.39 per cent last month.

According to the Kenya National Bureau of Statistics, maize flour, tomatoes and sugar are among the goods that recorded significant price increases, pushing the food and non-alcoholic drinks’ index up by 1.12 per cent.

In the three months, the price of maize flour in Kenya has risen by $0.15 due to a shortage of the crop. Millers have been importing the grains from Tanzania, incurring more than $6.8 million in costs in June alone.

Data from the National Cereals and Produce Board shows the national average retail price for a 90kg bag of maize has risen to $31.50, from $27.9 in June.

Then the energy regulator mid-July also effected the highest month-on-month raise in the prices of diesel and petrol, which factored in additional $0.06 road maintenance levy, pushing a litre of fuel to a high of $0.09 a litre.

But energy prices dropped marginally. The price of cooking gas dropped to an average of $20.3 in July for a 13kg cylinder, compared with $21.7 a month earlier, helped by the removal of value added tax on the product in the 2015/6 budget.

Uganda recorded a drop in its inflation to 5.1 per cent last month, from 5.9 per cent recorded in June, thanks to a drop in food and fuel prices.

Director of macrostatistics at the Uganda Bureau of Statistics Fred Mukisa said that in July, the prices of manufactured goods, fuel and food dropped, pushing down the annual headline inflation.

“We also saw a drop in the services inflation,” Mr Mukisa said.

Uganda’s annual core inflation dropped to 5.7 per cent in July, compared with 6.8 per cent in June. The country also recorded a drop in non-food prices inflation to 5.8 per cent, from 7.4 per cent.

Uganda has seen a slight increase in fuel prices in the past two months, with petrol and diesel increasing by an average of 10.8 per cent to retail at $0.77. Kerosene prices dropped by 7.7 per cent to retail at $0.98. This pushed the energy inflation costs down to 2.1 per cent in July, compared with 6.6 per cent recorded in June.

Mr Mukisa said that prices of vegetables increased by 14.6 per cent due to erratic supply.

Focus Economics analysts predict that Uganda’s inflation will average 6.2 per cent this year and 6.3 per cent in 2017.

Impact on low-income households

Kenya’s Central Bank, in a bid to check the rising inflation and maintain currency stability, has retained its base lending rate at 10.5 per cent, but still the prices of goods and services are expected to rise further in coming months as the impact of the $0.09 per litre increase in diesel prices begins to be felt in the economy.

Central Bank Governor Dr Patrick Njoroge said the rise in food prices coupled with the introduction of new taxes have also put pressure on inflation.

Explaining why the CBK retained the Central Bank Rate, Dr Njoroge noted that the anticipated rise in inflation as a result of the additional charge on fuel tax is expected to impact negatively on consumer prices.

But analysts at Citi said that despite Kenya’s inflation being below the 7.5 per cent band, it is still a concern for low-income earners.

“Rising food prices pose a specific problem for central banks in sub-Saharan Africa because food constitutes a bigger part of the basket that makes up the consumer price index than in other parts of the world,” said the Citi analysts. “Because of this, it also has a bigger impact on low-income households, so rising food price inflation pushes up low-income household inflation more than for upper-income households. This is shown in the case of Kenya.”

Others from Focus Economics predict that Kenya’s inflation will average 6 per cent this year.

But Uganda’s inflation will ride on the rains this year. If the rains are poor, there will be a double risk of food and fuel-driven inflationary pressure, warned Kingdom Securities macroeconomic analyst Mercyline Gatebi.

Brexit fears

On the currency front, the Kenyan shilling has remained stable against the dollar, despite the Brexit jitters, mostly boosted by inflows from foreign investors taking up government debt, wooed by an increase in rates.

“We expected some slight pressures on the local currencies but acted fast. So far, Brexit has not affected our economy despite the weakening of the pound sterling. We remain on the lookout to support our currency,” Dr Njoroge said. The Kenya shilling traded at 101.35/55 units to the dollar, having gained 3.2 per cent against the greenback so far this year.

The Ugandan shilling weakened on Monday, due to a surge in dollar demand by fuel importers and commercial banks covering their short positions. Midweek, the commercial banks quoted the Ugandan shilling at 3,380/3,390 units, compared with last week’s 3,367/3,377 units.

Stephen Kaboyo of Alpha Capital attributed the Ugandan shilling’s loss of ground in the early part of the week to a rise in demand but noted that it later recovered and stabilised as the Bank of Uganda’s open market operations took up $87.3 million in a seven-day repo. The shilling stayed in the range of 3370/3390.

“In the coming week, the shilling is likely to remain within the current range, with a slight appreciation as end-month effects wear off,” Mr Kaboyo said.