In February of 2022, various forms of media were inundated with declamations about the food prices and that the cost of living was rising in Kenya. As the arguments went on and many more Kenyans joined the chorus, the situation led to the questions about whether the “costs of living” was rising and the related demand that the president of Kenya and parliament should reduce those costs immediately.
Bearing in mind that elections will be held in August 2022, the question of rising prices and “costs of living” in Kenya bears great urgency. It is important to wade through some of the claims and determine what options the government of Kenya may pursue.
How is the Cost of Living Measured?
The cost of living refers to the monetary burden associated with purchase of all goods that are available in an economy. With simplification, these claims were driven by the reality that essentials that households purchased such as shelter, food, clothing and other important goods and services that cannot be foregone had risen while the income shocks that were caused by the Covid-19 pandemic had not wound down. Most references to costs of living are based on detectable change in the prices of the goods that households or individuals purchase. Predictably, any rise in the price of an item affects the disposable income for that household or individual, but that does not by itself confirm that costs of living are rising.
In the discourse on the rising cost of goods in the retail stores, Kenyans cited changes in the prices of fuel, food items and the ingredients for their preparation and transportation costs. These changes are captured by the Consumer Price Index (CPI), which is a composite indicator crafted by the Kenya National Bureau of Statistics (KNBS). As explained in this USER’s Guide, the CPI measures the “aggregate change in retail prices for a given basket of goods” (Page 4) and is constructed to be comparable over time. It contains a basket of goods priced from a base year but whose prices are collected during monthly intervals to compute the changes in the index.
Table 1 below is derived from the report issued on February 28, 2022. It contains the changes in prices that have occurred for the 234 items that are in turn clustered 13 categories (divisions) of goods and services within the CPI basket. The third and fourth columns show the change that have occurred in prices for the goods and services in each division of the basket for the foregone month and twelve month periods respectively.
Because of its frequency and the comprehensiveness of its coverage, the CPI is suitable for measuring inflation for household consumption. Many Kenyans have cited both the year long and the monthly changes in the prices for food and fuel items to argue that this means that overall costs of living are rising in Kenya. Due to the fact that the basket does not constitute every possible product within the economy of Kenya, the CPI is not technically designed to be a measure of the cost of living. Thus the claim that the cost of living is rising cannot be drawn by simple reference to changes in the CPI, because while it is an accurate measure for inflation, the range of goods included in it is insufficient to reach that conclusion.
This leads to the sensible question about what has changed and caused the public demand for government action. Reading the third and fourth columns on table 1, it is clear that the divisions (clusters) that have shown the highest positive changes in prices for the preceding twelve months are food and alcoholic beverages, housing, household furnishings, transport and personal care services. The changes range from 8.69% for food and alcoholic beverages to 4.54% for housing, water and energy sources. It understandable hat the collective effects of these price changes on amount to 5.08% of inflation over the year and would thereby create strains on household incomes.
On the other hand, column three in table 1 shows that the month by month change is more modest but still shows that the collective effect is still in the direction of rising inflation at 0.41%. Because food and fuel costs together constitute 47.52% of the total basket weight, that they have risen at the highest rates is consistent with the claims that some costs of risen for households.
The cause of the change in the prices of the individual items in each of the 13 divisions may vary. To the extent that the drivers of inflation over both the year and the month have been food, fuels and household furnishings, explanations should be explored. First, the prices of food items reflect the availability of domestic harvests and the import of cereals. Kenya’s National Drought Management Authority noted that the short rains expected in the last quarter of 2021 were inadequate with an estimate that the rainfall falling below 60% of the 40-year average. This failure of rains for the third consecutive season had the knock-on effect of leading to poor harvests and rising prices of food in the early 2022, with the possibility that another season of inadequate rainfall is expected in March to April 2022.
Imports are an efficient option for both energy from crude petroleum in addition to supplementary sources for cereals. Global supplies of food and petroleum were in part constrained by huge backlogs and disruptions to shipping that had occurred during the closures required for the containment of the Covid-19 pandemic. At the same time, the Kenya shilling has experienced a depreciation against the global trading currencies, meaning the the costs of imports would rise in comparative terms.
In spite of concerted pressure on the government of Kenya to reduce food and fuel prices, a more honest conversation would require an acknowledgement that the price controls are not tenable and were attempted at an earlier age with disastrous consequences. The role of private actors in the economy is a central plank of Kenya’s constitutional order and accords no space for government to determine the prices at which citizens would trade their goods and services for the exclusive convenience of another person. The obvious option available to government is for Kenya’s legislature to reconsider the taxation rates that it has imposed on these items and thereby induce private sector traders to reduce costs for consumers. In other words, raising the affordability of essential items.
Given the fact that essential items are not only subject to import tariffs and other global factors, Kenya’s legislature should reconsider the effects of Kenya’s domestic taxation and international trade tariff policies. But in the end, it is clear that affordability of goods and services in Kenya depend to a large extent on the cost of government and the necessary taxation that makes that possible. Price controls are not an option.
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Post date: Mon, Mar 14, 2022 |
Category: |
By: Kwame Owino, |
In February of 2022, various forms of media were inundated with declamations about the food prices and that the cost of living was rising in Kenya. As the arguments went on and many more Kenyans joined the chorus, the situation led to the questions about whether the “costs of living” was rising and the related demand that the president of Kenya and parliament should reduce those costs immediately.
Bearing in mind that elections will be held in August 2022, the question of rising prices and “costs of living” in Kenya bears great urgency. It is important to wade through some of the claims and determine what options the government of Kenya may pursue.
How is the Cost of Living Measured?
The cost of living refers to the monetary burden associated with purchase of all goods that are available in an economy. With simplification, these claims were driven by the reality that essentials that households purchased such as shelter, food, clothing and other important goods and services that cannot be foregone had risen while the income shocks that were caused by the Covid-19 pandemic had not wound down. Most references to costs of living are based on detectable change in the prices of the goods that households or individuals purchase. Predictably, any rise in the price of an item affects the disposable income for that household or individual, but that does not by itself confirm that costs of living are rising.
In the discourse on the rising cost of goods in the retail stores, Kenyans cited changes in the prices of fuel, food items and the ingredients for their preparation and transportation costs. These changes are captured by the Consumer Price Index (CPI), which is a composite indicator crafted by the Kenya National Bureau of Statistics (KNBS). As explained in this USER’s Guide, the CPI measures the “aggregate change in retail prices for a given basket of goods” (Page 4) and is constructed to be comparable over time. It contains a basket of goods priced from a base year but whose prices are collected during monthly intervals to compute the changes in the index.
Table 1 below is derived from the report issued on February 28, 2022. It contains the changes in prices that have occurred for the 234 items that are in turn clustered 13 categories (divisions) of goods and services within the CPI basket. The third and fourth columns show the change that have occurred in prices for the goods and services in each division of the basket for the foregone month and twelve month periods respectively.
Because of its frequency and the comprehensiveness of its coverage, the CPI is suitable for measuring inflation for household consumption. Many Kenyans have cited both the year long and the monthly changes in the prices for food and fuel items to argue that this means that overall costs of living are rising in Kenya. Due to the fact that the basket does not constitute every possible product within the economy of Kenya, the CPI is not technically designed to be a measure of the cost of living. Thus the claim that the cost of living is rising cannot be drawn by simple reference to changes in the CPI, because while it is an accurate measure for inflation, the range of goods included in it is insufficient to reach that conclusion.
This leads to the sensible question about what has changed and caused the public demand for government action. Reading the third and fourth columns on table 1, it is clear that the divisions (clusters) that have shown the highest positive changes in prices for the preceding twelve months are food and alcoholic beverages, housing, household furnishings, transport and personal care services. The changes range from 8.69% for food and alcoholic beverages to 4.54% for housing, water and energy sources. It understandable hat the collective effects of these price changes on amount to 5.08% of inflation over the year and would thereby create strains on household incomes.
On the other hand, column three in table 1 shows that the month by month change is more modest but still shows that the collective effect is still in the direction of rising inflation at 0.41%. Because food and fuel costs together constitute 47.52% of the total basket weight, that they have risen at the highest rates is consistent with the claims that some costs of risen for households.
The cause of the change in the prices of the individual items in each of the 13 divisions may vary. To the extent that the drivers of inflation over both the year and the month have been food, fuels and household furnishings, explanations should be explored. First, the prices of food items reflect the availability of domestic harvests and the import of cereals. Kenya’s National Drought Management Authority noted that the short rains expected in the last quarter of 2021 were inadequate with an estimate that the rainfall falling below 60% of the 40-year average. This failure of rains for the third consecutive season had the knock-on effect of leading to poor harvests and rising prices of food in the early 2022, with the possibility that another season of inadequate rainfall is expected in March to April 2022.
Imports are an efficient option for both energy from crude petroleum in addition to supplementary sources for cereals. Global supplies of food and petroleum were in part constrained by huge backlogs and disruptions to shipping that had occurred during the closures required for the containment of the Covid-19 pandemic. At the same time, the Kenya shilling has experienced a depreciation against the global trading currencies, meaning the the costs of imports would rise in comparative terms.
In spite of concerted pressure on the government of Kenya to reduce food and fuel prices, a more honest conversation would require an acknowledgement that the price controls are not tenable and were attempted at an earlier age with disastrous consequences. The role of private actors in the economy is a central plank of Kenya’s constitutional order and accords no space for government to determine the prices at which citizens would trade their goods and services for the exclusive convenience of another person. The obvious option available to government is for Kenya’s legislature to reconsider the taxation rates that it has imposed on these items and thereby induce private sector traders to reduce costs for consumers. In other words, raising the affordability of essential items.
Given the fact that essential items are not only subject to import tariffs and other global factors, Kenya’s legislature should reconsider the effects of Kenya’s domestic taxation and international trade tariff policies. But in the end, it is clear that affordability of goods and services in Kenya depend to a large extent on the cost of government and the necessary taxation that makes that possible. Price controls are not an option.
While Kenya has long implemented the NHIF (National Hospital Insurance Fund) whose core mandate is to provide medical insurance coverage to all its members and their declared dependants and also to make medical care affordable, enrolment rates, particularly in the voluntary and informal sectors, remain low. Yet, NHIF is the most common type of health […]
Introduction According to the United Nations, Double Taxation Agreements (DTAs) are “bilateral agreements between two countries which allocate taxing rights over income between those two countries thereby preventing double taxation of income. The main objective of DTAs therefore, is to prevent and or eliminate avoidance and evasion of taxes on income and capital by both […]
Courts as Monopolies Access to justice is fundamental in any democratic society, ensuring individuals can pursue their legal rights and seek redress for grievances. However, when courts operate as monopolies, it can have implications for access to justice. Monopolies have exclusive control or dominance over a particular market or industry. Courts are monopolies because they […]
Introduction Public policies are formulated to achieve specific societal outcomes, and when their implementation is delayed or falls short, it can lead to significant adverse consequences on the overall functioning of the system they are designed to govern. Implementation delays in government policies can occur for various reasons. These include intricate and protracted bureaucratic implementation […]
Introduction Every year since 2007, various countries around the world come together to celebrate Data Privacy Day, observed on the 28th of January. For Kenya, this day commemoration, spearheaded by the Office of the Data Protection Commissioner, brings together Data controllers, industry players, consumers and businesses. The theme for the 2024 celebration is: ‘Fostering a […]