Fuel-based inflation to slow economy

• Last month, the price of Murban crude, which accounts for more than 40 per cent of Kenya’s imported fuel, increased by 4.52 per cent, having risen to $101.75 per barrel in July up from $97.35 per barrel in June.
• Pump prices for the period between August 15 and September 14, 2012, were only reduced by between 41 cents and Sh1.98, a margin that analysts say is unlikely to trigger a price cut for both manufactured products and services such as transport.
• Analyst Robert Shaw said that should fuel-based inflation claw its way back as a result of the looming fuel price review, coupled with pressures on world food prices, the gains that the country has made in taming inflation could soon be eroded.

Economic analysts have warned that the looming rise in fuel prices is likely to halt further decline in overall inflation, which could see a return to a higher cost of living.

If the price of fuel increases by more than 10 per cent, economic analyst Kariithi Murimi says, the economy is likely to slip back into the fuel-based inflation that has been on a decline since the beginning of the year when the cost of fuel began dropping.

“The effect will depend on the magnitude of the increase. If it is something below 10 per cent, manufacturers are likely to absorb the costs and not raise the prices of products. However, a big margin will definitely attract an increase of prices for manufactured goods,” Mr Murimi said.

Crude oil

He was reacting to a statement released by the Energy Regulatory Commission last Tuesday in which director-general Kaburu Mwirichia warned of possible increases in pump prices in subsequent reviews as a result of escalating prices of crude oil in the international market. (READ: The cost of living at 17 month low)

“We have observed an upward trend in the price of crude and refined petroleum products in the international oil market over the last one month. This may adversely affect pump prices in subsequent price reviews,” said Mr Mwirichia.

Last month, the price of Murban crude, which accounts for more than 40 per cent of Kenya’s imported fuel, increased by 4.52 per cent, having risen to $101.75 per barrel in July up from $97.35 per barrel in June.

Consequently, pump prices for the period between August 15 and September 14, 2012, were only reduced by between 41 cents and Sh1.98, a margin that analysts say is unlikely to trigger a price cut for both manufactured products and services such as transport.

In July, the regulator slashed the price of super petrol by Sh9.21 a litre in Nairobi while that of diesel and kerosene came down by Sh8.01 and Sh8.8 a litre respectively in the largest price cut it has made since the beginning of the year, citing a significant reduction in the price of crude oil and the stability of the local currency.

Analyst Robert Shaw said that should fuel-based inflation claw its way back as a result of the looming fuel price review, coupled with pressures on world food prices, the gains that the country has made in taming inflation could soon be eroded.

“We are not likely to see further decline in pump prices. However, for the full threat of inflation to be realised, subsequent fuel price reviews must be of big margins and also coupled with a combination of other factors such as a rise in the cost of food,” he said.