Inflation pressures persist despite hold on fuel price hike, minimum tax


Inflation pressures persist despite hold on fuel price hike, minimum tax
A customer unpacks products from a trolley at the counter inside a supermarket in Nairobi, Kenya April 8, 2019. REUTERS

In Summary

  • Greater fuel costs at the middle of the month had been expected as a spillover effect to rising global oil prices while the implementation of the minimum tax was seen curtailing new investments and dragging down consumer demands.
  • Despite the hold on both factors, inflation is still expected to rise marginally in April with pressure being exerted by rising cost of food commodities such as bread and maize flour.
  • While the rate of inflation as of March stood at its highest since April last year, core inflation (non-food-non-fuel costs) has however stuck below two per cent in the past few years.

The cost of living/inflation is expected to trend upwards this month in spite of a hold on both fuel prices on April 14 and the hold on executing minimum tax on Monday.

Greater fuel costs at the middle of the month had been expected as a spillover effect to rising global oil prices while the implementation of the minimum tax was seen curtailing new investments and dragging down consumer demands.

Despite the hold on both factors, inflation is still expected to rise marginally in April with pressure being exerted by rising cost of food commodities such as bread and maize flour.

Bread prices this month have for instance soared by between Ksh.5 and Ksh.10 on the back of rising wheat import costs while maize flour prices have been on the ascendancy since a government ban on regional maize grain imports.

According to Genghis Capital Head of Research Churchill Ogutu, inflationary pressures are also expected to persist on base effects with the cost of living rising at the start of the year in contrast with a dis-inflationary trend around April last year.

“In my view, I don’t think inflation has been contained despite what we have seen in the last two weeks. Going back to last year, inflation had been on a declining trend around the same time. Because of this base effects, I would expect inflation to still be on the climb,” he said.

The rate of inflation tabulated through the Kenya National Bureau of Statistics (KNBS) Consumer Price Index (CPI) compares year on year living costs as opposed to just month on month changes.

While the rate of inflation in March stood at its highest since April last year, core inflation (non-food-non-fuel costs) has however stuck below two per cent in the past few years.

Inflation sub-indices such as transport have nevertheless borne the bulk of higher costs on the back of higher fuel prices and limited carrying capacity to attain social distancing requirements on public service vehicles resulting in greater bus fares.

In March for instance, the rate of inflation in transport stood at 18.12 per cent, the highest rate on any CPI sub-division.

On the flip side, Ogutu expects the impact of the minimum tax on inflation to be more profound after the conclusion of a petition challenging the legality of the tax on May 19 terming any short term effect of conservatory orders as a mere ‘sugar rush’.

Nevertheless, he views the existence of the tax as detrimental to both enterprise and demand.

“The minimum tax has been a negative factor to businesses curtailing investments and consumer demand,” he added.

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Story By Kepha Muiruri
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