IMF warns households to brace for high living cost

This is attributed to ongoing supply chain disruptions and high energy prices

In Summary
  • Inflation in Kenya is expected to average 5.9 per cent in 2022
  • Food prices are expected to increase at a more moderate pace of about 4.5 per cent in 2022 and decline in 2023.
A display of tomatoes at Kangemi Market
A display of tomatoes at Kangemi Market

The steep rise in fuel and gas prices will push inflation to levels last witnessed during the global recession witnessed in 2008, the International Monetary Fund has warned. 

In its World Economic Outlook released on Tuesday, the lender said elevated inflation is expected to persist longer than envisioned in an earlier outlook released last October, with ongoing supply chain disruptions and high energy prices continuing in 2022. 

"The cost of living will be severe in the developing countries especially in Sub-Saharan Africa on poor agricultural yields, high import cost due to weak currency and supply chain disruptions due to emerging Covid-19 variants," IMF says. 

Generally, inflation is expected to remain elevated in the near term, averaging 3.9 percent in advanced economies and 5.9 per cent in emerging market and developing economies in 2022, before subsiding in 2023.

The outlook shows futures markets indicate oil prices will rise about 12 per cent and natural gas prices about 58 per cent in 2022 before retreating in 2023 as supply-demand imbalances recede further.

Similarly, food prices are expected to increase at a more moderate pace of about 4.5 per cent in 2022 and decline in 2023.

In many countries, nominal wage growth remains contained despite employment and participation returning almost to pre-pandemic levels.

In Kenya, consumer prices rose to 0.91 per cent from the previous month in December, accelerating from November's 0.45 per cent rise.

December's figure was the highest reading in a year. The increase was largely driven by rising prices for food and non-alcoholic beverages. In addition, price pressures for housing, utilities and fuel increased at a faster rate.

Even so, inflation dropped to 5.7 per cent in December, edging down from November’s 5.8 per cent. Last month's reading represented the lowest inflation rate since September 2020. 

FocusEconomics Consensus Forecast panelists expect inflation to average 5.9 per cent in 2022, which is up 0.2 percentage points from last month’s forecast before dropping to 5.5 per cent in 2023.

Last week, IMF cautioned that the cost of living could edge up on the US Federal Reserve move to hike the lending rate, a move that could rattle financial markets and trigger capital outflows and currency depreciation. 

It said emerging markets with high public and private debt, foreign exchange exposures, and lower current-account balances had already seen larger movements of their currencies relative to the U.S. dollar.

The Kenyan shilling has been on a spiral, hitting new record lows on a daily basis since early November, largely weighed on by a stronger greenback.

The weak shilling means high imports cost which is likely to be passed to consumers. 

"The currency depreciation pain and low agricultural yields on poor rainfall will see families dig dipper in the pocket to access basic needs,'' FocusEconomics said.

IMF is however hopeful that the high inflation wave will soften in the near future.

It says that assuming medium-term inflation expectations remain well-anchored and the pandemic eases its grip, higher inflation should fade as supply chain disruptions ease, monetary policy tightens, and demand rebalances away from goods-intensive consumption towards services

More immediately, reducing tariffs and trade barriers can help ease supply disruptions and inflation pressures globally while also facilitating better resource allocation over longer horizons.

''These efforts, combined with global cooperation on strengthening supply chains, would help reduce precautionary hoarding incentives and allow for smoother adjustment to future shocks," the lender says.