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November 21, 2018

Rise in food prices hits the low-income household hardest

About this time of year, I would park myself on the verandah at the Mombasa Club and search for the sea breeze. Later I would learn that I was in fact sniffing the sea breeze for petrichor – the earthy scent produced when rain falls on dry soil.

According to Wikipedia, some scientists believe that humans appreciate the rain scent because ancestors may have relied on rainy weather for survival. I like the idea that my sojourns to that verandah at the club, tied me somehow to my ancestors. And from that time I have always been interested in the weather and meteorology, which is the interdisciplinary scientific study of the atmosphere. The study of meteorology dates back millennia. For those who are weather enthusiasts, the current drought conditions in East Africa is being caused by an ‘’obscure’’ climate phenomenon called the Indian Ocean Dipole (IOD) – an oscillation of sea surface temperatures in the Indian Ocean.

It wasn’t until the 1990s that Japanese scientists discovered the IOD, a warm pool of water that migrates between western and eastern “poles” and affects atmospheric temperatures and rainfall. The phenomenon occurs in cycles of positive (warmer) and negative (cooler) sea temperatures, but it has become more extreme in recent years due to climate change. A negative IOD results in less rainfall in East Africa, and that’s contributing to the current drought that aid agencies warn could trigger mass famine. The scientists found that before 1924, the IOD occurred approximately every 10 years, but since 1960, IOD events have been occurring approximately 18 months to three years apart. The researchers suggested that global warming effects on the western Indian Ocean have driven the observed shift in IOD variability – and note that the IOD has replaced the El Nino-Southern Oscillation as the major driver of climate patterns over the Indian Ocean region. It is this negative IOD which has parched the country and the region.

 What is clear now is that meteorology intersects with monetary policy, and at times with considerable violence as we are witnessing now. Kenya’s inflation jumped to 9.04 per cent year-on-year in February from 6.99 per cent a month earlier, the statistics office said last week. On a month-on-month basis, inflation was at 1.72 per cent compared to 1.00 per cent a month earlier. That’s a big asymmetric move right there and this moment is reminiscent of 2011 when a weather shock (coupled with elevated crude oil prices) and a slow-motion monetary policy response saw the shilling tumble to an all time low of 107.00 against the dollar in October 2011.

Interestingly in 2011, we had our noses pressed right up against an election just as we do now. There is also a political dynamic at work. Food price increases have a big outsize positive/negative well-being effect. Folks earning the minimum wage spend a bigger percentage of their salary on food (in some cases as much as 50 per cent), and therefore the food price rise amplifies at the lower salary point. I am not ignoring those who are at the ‘’bleeding edge’’ of the drought, they are in extremis. In 2011, GDP slowed over one per cent. The economy is slowing and this was further confirmed by higher frequency data: The Markit Stanbic Bank Kenya Purchasing Managers’ Index (PMI) dropped to 50.1, a record low since the survey began in January 2014, down from 52.0 in January. A reading above 50.0 marks growth. Private sector credit growth stood at 4.3 per cent in December, the Central Bank said.

Razia Khan, the Standard Chartered lead economist for Africa said this on Twitter: ‘’Before you panic about Kenyan CPI, every single component (ex-food) is showing <5% y/y inflation. But food is 36% of the CPI basket.’’ 


Aly-Khan Satchu is a financial analyst

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