Why Commodity Prices Aren’t Falling Anytime Soon

Women peddle ripe bananas in the city of Kakamega on January 20, 2022. [Benjamin Sakwa, Standard]

Over the past few months, Kenyans have experienced a spike in the prices of major food items.

According to data from the Kenya National Bureau of Statistics, the level of inflation, defined as the persistent increase in commodity prices, has steadily declined to about 5.3%, but the paradox is that commodity prices basis remain high.

This is due to several factors. First, a spike in food prices can be influenced by drought-induced inflation whenever the country receives insufficient rainfall to sustain a good harvest.

The short rains of last year were insufficient, leading to a decrease in food supply while demand remained high and therefore a spike in prices. With the long rainy season here, we expect lower inflation due to drought due to the availability of more food crops.

Second, imported inflation is a major cause of rising commodity prices. Imported inflation occurs when the rise in the prices of imported products such as petroleum products leads to an overall increase in the price of commodities.

Cost of products

This is a big challenge when it comes to stabilizing the prices of essential commodities.

For example, soaring prices of commodities such as cooking oil, steel bars and wheat can be attributed to the high cost of products or raw materials in overseas markets and a low shilling (se trading at 116 shillings to the dollar).

Third, the Covid-19 recovery has led to an increase in demand for most commodities around the world, pushing the global inflation rate to around 6%.

Covid has disrupted value creation and delivery systems, affecting the global supply of most raw materials. With the recovery expected to continue, demand for many commodities will remain higher than weak supply as companies move towards full optimization of production systems.

High taxes are contributing to high prices for commodities such as oil and gas products, as the state increases its revenue collection amid low production occasioned by Covid-19.

While the price of steel has increased by 25% globally, in Kenya it has increased by 70% due to cartel-like trends.

In conclusion, this means that the prices of essential goods will remain high until there is a full recovery and a stable supply of goods on the world market, good rains this year, an abnormal price increase controlled, the shilling becoming stable against hard currencies and taxes are reduced especially for basic necessities such as petroleum products.

The author is an economist and professor of innovation

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