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Kenya’s core inflation unchanged despite drop in consumer prices

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Non-food, non-fuel inflation — or core inflation — remained unchanged in June, at 3.4 percent, despite a significant drop in overall consumer prices in the same month, pointing to the persistence of underlying cost of living pressures.

Overall inflation, which factors in food and fuel prices, also known as headline inflation, hit a near four-year low of 4.6 percent in June, from 5.1 percent in May, while core inflation remained unchanged in the same period.

Core inflation is viewed as a critical measure of consumer prices, since it is less affected by short-term changes that are usually prevalent particularly with goods such as food and fuel.

The stickiness in the measure affirms the decision by the Central Bank of Kenya (CBK) to leave its benchmark interest rate unchanged at 13 percent in its June meeting, having expressed caution on underlying inflationary pressures even as headline inflation neared the midpoint target of five percent in May.

“The MPC noted that its previous measures have lowered overall inflation to the midpoint of the target range, stabilised the exchange rate and anchored inflationary expectations. The committee further noted that non-food/non-fuel inflation has remained sticky in recent months, and that interest rates in major economies are expected to remain higher for longer due to the stickiness of inflation,” CBK said last month.

CBK Governor Kamau Thugge has previously indicated that its monetary policy decisions are usually dictated by the measure of core inflation where actions taken are usually more impactful on the measure.

Core inflation shows the second-round effects of inflation where a rise in the price of key commodities such as food and fuel filters through other segments including transport, healthcare, manufacturing, recreation and education services.

The CBK has an unofficial target on the core inflation rate of no more than three percent. It has previously reacted to a pick-up in core inflation by lifting its benchmark lending rate as part of its price stability mandate in the economy.

A surprise liftoff in the rate in June of 2023 for instance commenced the interest rate tightening cycle by the CBK which saw the Central Bank Rate rise to 13 percent currently from 9.5 percent in June 2023.

“Fighting second-round effects is precisely what we are trying to do with the increase of CBR. We are very concerned about the trend in non-food non-fuel inflation, which for some time has been below three percent,” Dr Thugge said in June last year when he began raising the benchmark interest rate.

Core inflation has not been under three percent since June of 2022 when it settled at 2.89 percent.

The stickiness in the rate could see the CBK holding up interest rates higher for longer, keeping other costs such as borrowing up amidst concerns of rising loan defaults in the banking industry.

The gross non-performing loans ratio hit an 18-year high of 16.1 percent in April 2024 with agriculture, real estate, tourism, restaurant and hotels, trade, building and construction sectors driving up the asset quality deterioration.

The operations of commercial banks have however remained resilient on sound capital and liquidity buffers even as they continue to make adequate provisions to cover the expected credit losses.

The profitability of the industry through three months to March was up by 12.9 percent on a pre-tax basis to Ksh73.5 billion ($575.3 million) from Ksh65.1 billion ($509.6 million) at the same time last year.

The rise in industry profits has been anchored largely on reduced expenses and higher operating income.

 

Source: https://www.theeastafrican.co.ke/

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