KENYA INFLATION ACCELERATES IN 2008

UNCLAS NAIROBI 000414 SIPDIS DEPT FOR AF/E, AF/EPS, EEB/IFD/OMA DEPT ALSO PASS TO USTR FOR BILL JACKSON DEPT ALSO PASS TO USAID/EA TREASURY FOR VIRGINIA BRANDON COMMERCE FOR BECKY ERKUL SIPDIS E.O. 12958: N/A TAGS: ECON EFIN EAGR PGOV KE SUBJECT: KENYA INFLATION ACCELERATES IN 2008 ¶1. Summary: Inflation in Kenya fell in the last quarter of 2007 and dropped to 9.76% for the year as a whole. Unfortunately, the violence that erupted after the December 27 election is undoing these gains. The unrest blocked or hindered transportation across the country, creating scarcities and raising prices. Kenya's Consumer Price Index (CPI) jumped an almost unprecedented 8.8% in January 2008, with seasonally adjusted average annual inflation up 10.5%, led by food, energy and transportation. Whether this inflationary trend continues depends on whether the politicians can bring the violence under control and restore road security in the Rift Valley and western Kenya. End summary. Inflation Declined in Q4 2007 -------------- ¶2. Overall average annual inflation (seasonally adjusted) declined each month in the fourth quarter of 2007, dropping to 9.76% in December, well below the 2006 level of 14.45%, and the lowest annual rate in the last three years. Underlying average annual inflation (seasonally adjusted) crept up steadily to reach 5.18%, the highest rate since January 2006, and somewhat over the Central Bank of Kenya's (CBK) 5% target ceiling for monetary management. After recording small month-on-month (MOM) increases in October and November, food prices in December rose 4.1% MOM, and transport and communication prices rose 1.1%, both probably linked to higher demand due to the holiday season. Food Prices Lead the Way, Poor Take the Hit -------------- ¶3. Of the 10 broad categories of goods and services, food inflation remained the highest in 2007. Food prices rose 15.95% for the year, followed by alcohol and tobacco at 11.6%, transport & communication at 9.5%, housing at 6% and fuel and power at 5.7%. However, the price increases for food and power were significantly lower than in ¶2006. Only prices in the alcohol and tobacco and transport and communication categories showed significantly higher increases in 2007 than in 2006. Because of the high weighting for food, the Nairobi Lower Income Group suffered the highest inflation in 2007 at 12.9%. This, however, was a significant drop from the 2006 level of 19.2%. Inflation was 9.6% for the Nairobi Middle/Upper Income Group, up 50% from the previous year. Inflation for the other major cities in Kenya averaged 12% in 2007, down a little from the 2006 level of 14.67%. January 2008 Prices Jump Due to Crisis -------------- ¶4. The Kenya National Bureau of Statistics (KNBS) reported the Consumer Price Index (CPI) jumped an almost unprecedented 8.8% in January 2008. Overall (non-adjusted) January prices rose 18.2% YOY compared to 12% in December, and seasonally adjusted average annual inflation was 10.5% in January. As expected, food prices rose 24.6% YOY, transportation 17.8% and fuel and power by 10.6%, as attacks on trucks carrying fuel, food and everything else caused shortages and raised transportation prices. Kenya Association of Manufacturers (KAM) Chairman Steve Smith warned that a combination of high energy prices, currency depreciation, food shortages, and other production bottlenecks will raise inflation towards 20% in 2008. Interest Rates Also Rising -------------- ¶5. Investors are also demanding higher interest rates at government security auctions, both for the higher risk factor and in expectation the government will have to increase local borrowing to cover the crisis' costs. In January, the rate for 91-day T-bills rose 7.92% and the rate for 182-day T-bills rose 2.05%. Comment -------------- ¶6. Even if the violence ends today, the cost of living is set to rise significantly in the next few months due to a combination of steep increases in fuel and basic food prices and the impact of the violence. It is not yet possible to predict how long it will take for the roads to become safe again, inventories to be restored, and prices to come down. However, the poor rains in the coastal region, the current crop losses in the Rift Valley, and displaced farmers' inability to plant the next crop in the breadbasket Rift Valley threaten Kenya's food security, auguring continued food price inflation. International commodity price increases will also affect Kenya. Nor can anyone say how high interest rates will rise. Banks were flush with liquidity at the end of 2007 and may try to limit their interest rate increases to help keep their customers in business, but high inflation may push interest rates up regardless. RANNEBERGER