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Kenya’s core inflation has remained unchanged despite fluctuations in the overall cost of goods and services over the last 18 months, indicating that households are under pressure from high prices of consumer items other than fuel and food.
Core inflation is the change in the costs of goods and services, but it does not include those from food and energy sectors. This measure excludes these items because their prices are much more volatile.
Core inflation, also known as non-food-non-fuel inflation, stood at 3.4 percent in September, compared to 3.5 percent in August and 3.6 percent at the beginning of the year.
Meanwhile, overall inflation dropped to 3.6 percent last month—the lowest since December 2012— on the back of a sharp fall in food and fuel prices compared to the same month last year.
Improved local weather and global supply chain conditions have contributed to the fall in food prices, while fuel prices have come down due to lower international crude costs.
At the beginning of this year, headline inflation stood at 6.85 percent. Food inflation has meanwhile declined from 7.87 percent in January to 5.1 percent in September, while fuel inflation has fallen to 1.1 percent from 14.3 percent in the period.
Food, fuel and utilities account for 48 percent of the inflation basket, hence their oversized influence on the headline inflation rate.
While fuel and food inflation are largely influenced by supply factors core inflation gives a more accurate picture of the demand side of inflation. It is, therefore, a good indicator of the effectiveness of the Central Bank’s monetary policy actions on reducing or increasing money supply in the economy.
“The limited movement of core inflation, both when headline number went up and when it has come down, shows that the demand side of inflation has not been impacted as much by monetary policy actions,” said Churchill Ogutu, an economist at IC Group (Mauritius).
Core inflation tends to be less elastic compared to headline inflation, which is largely influenced by the volatile change in food and fuel prices.
It also shows the second-round effects of inflation once higher food and fuel prices filter through to other segments including transport, healthcare, education services, manufacturing, and recreation services, among others.
While the Central Bank of Kenya (CBK) has a target of five percent plus or minus 2.5 percentage points for overall inflation, it doesn’t have an official target for core inflation, even though it is said to prefer that this inflation goes no higher than three percent.
Core inflation has not been under three percent since June 2022, when it settled at 2.89 percent, and it touched a recent high of 4.45 percent in February 2023.
Concerns about high core inflation, and a weak shilling, were behind the decision by the CBK to raise its base rate from 9.5 percent to 10.5 percent in June last year, and the subsequent increases all the way to 13 percent.
According to the CBK, core inflation of about three percent is consistent with overall inflation of five percent, meaning that the present situation where headline inflation is nearly at par with core inflation shows an imbalance between the price of food and fuel and prices of other goods in the economy.
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