Kenya’s Inflation Still below the Mid-Point and set to remain mild

Kenya’s headline inflation remained below the mid-point 5.00 percent target level in the 1Q18 period, mainly attributed to the base effect.

According to a report released by Genghis Capital, food inflation averaged 3.63 percent in the subject quarter – in comparison to 14.74 percent recorded in 1Q17 – boosted by improved weather condition in the country.

The month-on-month (m/m) comparison of a number of select vegetables in the quarter indicated cyclical weather impact; recording a notable uptick in retail prices.

Core inflation, though still subdued, showed signs of rebound recording a gradual uptrend from 3.50 percent on a year-on-year (y/y) in January to 3.80 percent y/y in March.

This stable macroeconomic environment supported fledgling demand pressure. Fuel inflation charted an upward trajectory driven by the trickle-down effect of the global oil prices that filtered into the importation of fuel pump product prices.

In March, this was augmented by the surge in charcoal price (first-round effect) due to government logging ban and disruption in charcoal trade. Fuel inflation touched 8.20% y/y in March from 3.27% y/y in a similar period last year.

“Our baseline scenario is that inflationary pressure will remain mild in 2Q18 due to the base effect. We expect an upper bound of 5.00 percent in the second quarter’s headline inflation print,” said analysts from Genghis.

The biggest driver of the cooling off in inflation has been the ease of food inflation which we expect to steady at 2.00 – 3.00 percent this quarter.

Organization of the Petroleum Exporting Countries (OPEC) and 10 non-OPEC partners will review the 1.8 million barrels per day (bpd) oil production cut deal in June.

“We expect the deal to be in place throughout 2018 and has since propelled global oil prices to 3-year high levels close to USD 70 per barrel. We thus estimate fuel inflation to hit 10.0 percent end 2Q18 due to the knock-on effect of the elevated cost of imported fuel pump products,” said Genghis.