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Fuel drives inflation to highest level in 19 months 

The combination of a weak shilling, high food and fuel prices pushed the inflation rate to a 19-month high in June, causing concern over its possible impact on consumer purchasing power and overall growth.
Official data released Wednesday indicates that the cost of living rose at the rate of 14.49 per cent in a month that saw the Kenyan shilling touch an historic low of Sh92 to the dollar, wiping out Finance minister Uhuru Kenyatta’s recent attempts to contain it through fiscal policy.

The Kenya National Bureau of Statistics (KNBS) linked the surge in inflation pressure to high transport and energy prices in the month as the shilling weakened, raising the cost of imported goods across the board.

Food prices, which rose by 22.52 per cent from a year earlier, provided the greatest force to the rise in consumer price index besides the cost of transport that rose by 22.71 per cent. “This was the result of significant increase in the cost of maize flour, maize grain, carrots, sugar and rice,” said KNBS director Anthony Kilele. The average price of a 2kg packet of sifted maize flour, for instance, rose from Sh95 in April to Sh109 in May and more than Sh130 in June. It remains to be seen what impact the near tripling of the rate of inflation from January’s 5.45 per cent will have on the rate of economic growth whose target this year is six per cent.

Runaway inflation has traditionally had a negative effect on consumer power, suppressing demand for goods and services that in turn hurts the pace of economic expansion. The rise in inflation — for the eighth consecutive month — is also set to raise questions on the effectiveness of recent measures that the government put in place to ease the high cost of goods burden.

KNBS released the inflation data as the Central Bank of Kenya swang into action with new measures to tame exchange rate volatility and stabilise pricing in the economy. The financial services sector regulator said it would henceforth fix the daily rate at which commercial banks can borrow from the CBK through the overnight discount window – responding to recent concerns over the incidence of arbitrage in the market. Commercial banks have traditionally borrowed from the lender of last resort (CBK) at the Central Bank Rate (CBR) that now stands at 6.25 per cent.

But a recent increase in T-Bills rate to an average of nine per cent has offered the banks an opportunity to borrow cheaply from the CBK and lend the same money to the government at a higher rate.

“Henceforth, the operational interest rate for the CBK Discount Window will be reviewed from time to time and posted on the CBK website on daily,” said Jackson Kitili, the CBK director of banking services, national payment system and risk management, effectively scrapping the CBR as the signal tool.

Mr Kilele said the exchange rate volatility was the key driver of the significant rise in the cost of electricity that also contributed to the increase in inflation.

“Foreign exchange cost adjustment was the main contributor to the higher cost of electricity,” he said, adding that consumers paid Sh1.38 for every Kwh in June compared to Sh0.81 in May.

The Kenyan currency has plummeted from a high of Sh83 to the dollar in March to Sh92 to the greenback early this week, representing nominally the lowest level in the currency’s history. Yesterday the Kenyan unit traded at an average Sh90.02 to the US currency. KNBS estimates that 87.9 per cent of Kenya’s inflation is driven by the surge in food, oil and housing prices that feed on each other to worsen the cost of living.

The impact of a weak shilling on consumer prices was brought home this week when bread makers increased retail prices to cushion their earnings from rising cost of raw materials. Similar movements in the pricing of commodities and energy have convinced economists that inflation will continue to rise in coming before peaking later in the year and begin to decline.  “We expect inflation to average 13.6 per cent in 2011, with further increases probable before it peaks and starts to decline again,” Razia Khan, a London-based economist with Standard Chartered Bank said last week. Cooking oil prices have doubled in the last one year to retail at the current average of Sh410 per two litre can, which is a 30 per cent rise from the beginning of the year on the back of rising prices of palm oil.

High inflation could trigger fresh demands for higher wages as households feel the pain of a weak shilling and rising cost of transport. The cost of electricity is also expected to continue rising as the country taps deeper into expensive thermal power to meet its needs with the drop in supply from the cheaper hydro power.

Electricity distributor Kenya Power is said to be seeking a 25 per cent upward adjustment of consumer power tariffs, a review that could inflate electricity bills by an average of Sh400 and expected to come into force as early as mid next month.



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