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