Kenyans have for the last 3 months experienced a rise in prices of basic commodities such as sugar, maize, fuel and agricultural produce. In Kenya, the inflation this year peaked at 6.39% (the highest in East Africa) as neighboring countries recorded a fall in the cost of living.
Furthermore, the recent increase in crude oil prices in the international market has also contributed to the rising inflation rates. This year the price of a barrel of crude oil rose from $29 to $41.91 per barrel in August.
Data from the Kenya National Bureau of Statistics revealed that flour, maize, tomatoes and sugar recorded significant bump in prices, driving the food and non-alcoholic drinks index by slightly over 1%. The increase in prices of food items that constitute about 40% of the basket of goods used to determine inflation; saw Kenya’s inflation rate jump to 6.39% in August from 5.8% in June.
There is a common belief that the high taxes levied on fuel imports by the government is solely responsible for the high cost of living. While this is partly true, there are a variety of reasons that also contribute to the rising costs of household goods.
Before we examine these reasons we must get a better understanding of inflation. Price hikes for particular household items do not qualify as inflation.
Inflation is the simultaneous rise in prices across the board. So what are the factors that lead to inflation and the rising cost of basic household items?
- Supply Constraints: Falling output levels are associated with supply constraints ranging from the high cost of inputs, low-yielding varieties, the high cost of infrastructural services and expensive credit. Additional factors that restrict supply include rising petroleum prices, climate change, and agricultural subsidies.
- Trade Policies: Regional differences under COMESA and EAC trade regimes in the implementation of tariffs on sensitive products, combined with exemptions and duty remission schemes, resulted in price disparities.
- Demand Factors: The increased rise in population, use of food for fuel production, and changes in consumption patterns; have put pressure on agricultural produce and increased food prices.
- Institutional and Governance factors: Institutional weaknesses in the petroleum sector are responsible for the high fuel prices witnessed in the last few years, despite a global slump in the same prices. Issues such as old and outdated refinery, inadequate hedging facilities and poor implementation of the 90-day stock have played a part in rising fuel costs.
In addition imposing of excise duty and VAT, have led to higher prices, thus pushing up the Consumer Price Index.
Once inflation has set in it is quite problematic to reduce it. For instance, the higher the prices of household goods, the higher employees will demand to be compensated. This will lead to a wage war spiral. The expectation of inflation is important. If people expect high inflation, it becomes a self-serving cycle.
With salaries and wages remaining fixed despite the rising cost of household items, you can expect your finances to be a bit stretched. However, do not lose sight of your long-term goals. Do not let the current high prices stop you from saving for the future.
What do you think about the rising cost of living? How do you think it should be solved? Share your thoughts with us below.
Learn More:
