The Impact of Unchanged Consumer Prices on Kenya’s Core Inflation

Unofficially, the Central Bank of Kenya wants the core inflation rate not to exceed three per cent.

Despite a notable decline in Kenya‘s overall consumer prices in June, core inflation, or inflation unrelated to food and fuel, stayed stable at 3.4%, suggesting the continuation of underlying pressures related to the cost of living.

While core inflation was constant throughout that time, overall inflation – also referred to as headline inflation – which accounts for the cost of food and fuel – dropped to 4.6% in June, almost four years below its peak of 5.1% in May.

Since core inflation is less impacted by the short-term fluctuations that are typically present, especially with products like food fuel, it is considered a crucial indicator of consumer prices.

The measure’s stickiness supports the Central Bank of Kenya’s (CBK) June meeting decision to maintain the 13% benchmark interest rate. The CBK had cautioned about underlying inflationary pressures despite headline inflation approaching the five per cent midpoint target in May.

Kenya keeps its benchmark rate at 13% despite steady inflation. The MPC stated that its prior actions had stabilised the currency rate, reduced total inflation to the middle of the target range, and grounded inflationary expectations. The committee also pointed out that interest rates in major economies are anticipated to stay higher for an extended period of time because of the stickiness of inflation, which has persisted in non-food and non-fuel inflation in recent months, as CBK stated last month.

Governor Kamau Thugge of the CBK has previously stated that the measure of core inflation often determines the monetary policy decisions made, with actions having a greater influence on the measure.

Core inflation is a measure of the inflation’s spillover effects, or how increases in the cost of staples like food and gasoline affect other industries like transportation, healthcare, manufacturing, leisure, and education.

Unofficially, the CBK wants the core inflation rate not to exceed three per cent. As part of its responsibility to maintain price stability in the economy, it has in the past raised its benchmark lending rate in response to an increase in core inflation.

The Central Bank Rate increased from 9.5% in June to 13% today due to the CBK’s interest rate tightening cycle, which was started by an unexpected rate liftoff in June 2023.

“We are specifically attempting to combat second-round impacts by increasing CBR. When he started hiking the benchmark interest rate in June of last year, Dr Thugge stated, “We are very concerned about the trend in non-food, non-fuel inflation, which has been below three per cent for some time.”

Since June 2022, when it settled at 2.89 per cent, core inflation has never been less than three per cent. Because of the rate’s stickiness, the CBK may decide to keep interest rates higher for extended periods of time, which would raise other costs like borrowing in the face of growing loan defaults in the banking sector.

Kenya’s GDP would expand by 5% less in 2024. In April 2024, the gross non-performing loans ratio reached a record high of 16.1%, driven mostly by the decline in asset quality in the trade, building and construction, restaurant and hotel, real estate, and agriculture sectors.

Commercial banks continue to make sufficient provisions to cover expected credit losses, but their operations have remained robust due to strong capital and liquidity buffers.

By 12.9% on a pre-tax basis, the industry’s profitability increased from Ksh65.1 billion ($509.6 million) during the same period last year to Ksh73.5 billion ($575.3 million) through the first three months of March. Lower costs and better operational income have been the main drivers of the industry’s profit increase.