July 5, 2021/Cordros Report
In line with our expectation, Kenya’s June inflation rate increased by 45bps to 6.32% y/y in June (May: 5.87% y/y) – the highest since February 2020 (7.17% y/y). The outturn was 10bps lower than Cordros’ estimate (6.42% y/y), with the largest deviation stemming from the food basket. The increase in the consumer price index was due to (1) low base effect from the prior year, (2) increased fuel cost and (3) surge in food prices. On a month-on-month basis, the headline inflation increased by 0.12% in June (May: 0.18% m/m).
The increase in the non-food inflation (0.15% m/m in June vs May: 0.11% m/m) was in line with our expectation (0.20% m/m) given the combined impact of (1) increased electricity prices after the Energy and Petroleum Regulatory Authority (EPRA) increased the fuel surcharge by 24.3% to KSH3.63/kilowatt on 18th June – the highest since May 2019 and (2) pass-through impact of the rally in oil prices on the price of fuel given that Kenya is a net importer of refined petroleum products.
Elsewhere, food prices rose sharply to 8.46% y/y (May: 7.02% y/y), given the trend in global food price and base effects from the prior year. Indeed, the FAO Food Price Index (FFPI), which measures monthly changes for a basket of cereals, oilseeds, dairy products, meat and sugar, increased by 39.7% y/y as of May (vs April: 33.3% y/y). The preceding was on account of an increase in the prices of sugar, cereals and dairy products. On a month-on-month basis, food inflation grew slower by 0.06% m/m compared with 0.32% m/m in May.
We expect the impact of the increased fuel surcharge to put upward pressures on the prices of essential items in the current month, with negative spillovers on the prices of non-food products. In addition, we expect non-food inflation to remain pressured by the uptick in fuel prices given the rally in global crude oil prices. Accordingly, we expect the non-food inflation to grow by 0.18% m/m. Similarly, we see no respite yet for food prices because of the below-average rainfall during the March-May long rains, although we note that increased cross-border imports could moderate the price growth. Consequently, we expect the subdued food supply to increase food inflation by 0.08% m/m in June.
On a balance of factors, we forecast a 0.15% m/m increase in headline inflation in July, with the favourable base effects from the prior year cascading to an 8bps increase in the year-on-year inflation to 6.40%.
