VZCZCXYZ0011
PP RUEHWEB
DE RUEHNR #0414 0391010
ZNR UUUUU ZZH
P 081010Z FEB 08
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC PRIORITY 4631
INFO RUEHXR/RWANDA COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
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