September 2, 2021/Cordros Report
According to the recently released inflation report by the Kenya National Bureau of Statistics (KNBS), headline inflation increased marginally by 2bps to 6.57% y/y in August from an upwardly revised print of 6.55% y/y in July. During the review period, the increase in domestic prices was mainly due to the higher prices of food produce (+10.44% y/y vs July: +8.82% y/y) as erratic rainfall continues to impede food supplies. On a month-on-month basis, the headline inflation rose slower by 0.23% (July: 0.26% m/m).
Unlike July, food prices drove the increase in the headline inflation on account of (1) reduced household food availability and (2) below-average crop production in the agricultural areas, given the impact of the poor rains between March and May. Accordingly, food prices increased by 0.46% m/m (July: -0.46% m/m) – the highest in five months. Pressure was most significant in the prices of Cabbages (+3.74% m/m vs July: +2.45% m/m), Spinach (+3.06% m/m vs July: +0.61% m/m), and Oranges (+2.44% m/m vs July: -1.81% m/m). On a year-on-year basis, food prices rose by 10.44% (July: 8.82% y/y) – the highest since September 2017 (11.50% y/y) when the country’s rain-fed farms were battered by a severe drought which curtailed food production and subsequently lifted prices.
Elsewhere, the non-food basket moderated by 51bps to +0.10% m/m (July: +0.61% m/m) despite the depreciation of the currency (-1.15% m/m to KSH109.97/USD as of 31st August), which is the steepest since the pandemic-induced currency depreciation witnessed in April 2020 (-2.42% m/m). Sifting through the breakdown, the moderation in the non-food basket was driven by the HWEGF (+0.32% m/m vs July: +1.34% m/m), Transport (-0.32% m/m vs July: +0.03% m/m) and Clothing & footwear (+0.14% m/m vs July: +0.21% m/m) sub-baskets. On transportation, we think the price decline resulted from public service vehicles resuming the carriage of passengers at full capacity compared to July when they increased prices to accommodate reduced carrying capacity (a measure adopted to reduce the spread of the delta variant of the COVID-19 pandemic).
Despite the increase in inflation, we do not expect the price pressure to touch the upper bound of the Central Bank of Kenya’s (CBK) inflation target (7.25%) over the short term, given the favourable base effect from the previous year. In September, we expect food prices to be pressured, as depletion of the below-average long rains food stocks continues to drive household reliance on market supplies to unusually high levels. Besides, the Eastern and Northern regions are in the lean season – the period between planting and harvesting. Accordingly, we project food inflation to increase by 0.51% m/m. Similarly, we expect the non-food basket to resume an uptrend given the (1) lagging impact of currency depreciation and (2) increased prices of cooking gas and electricity. Thus, we forecast the non-food inflation to increase by 15bps to 0.25% m/m.
Sequentially, we forecast a 0.34% m/m increase in headline inflation in September, which translates to a 36bps rise in the year-on-year inflation to 6.93% y/y.
