Inflation set to decline further this month as oil prices fall for a second month running

By Ben Kinyanjui

The persistent high inflation witnessed over the last six months could finally drop sharply this month as oil prices decline.

ERC director general Eng Kaburu Mwirichia

The Energy Regulatory Commission (ERC) announced Sunday that oil prices could drop by between Sh3-7 a litre as price of crude oil in the international market decline.

The shilling that had depreciated significantly has also strengthened against the dollar making imports cheaper. All oil products are all imported in foreign currency.

Despite a decline in December to 18.7 per cent from 19.7 per cent in November, inflation remained high due to high oil prices and high food prices.

The government expects inflation to fall to single digit levels by end of the year, a feat possible if oil prices continue to fall due to economic slow down in Europe as the eurozone debt crisis deepen.

ERC projects price reduction of approximately Sh3.50 – 4.50 for Super Petrol and Sh6-7 for both Kerosene and Diesel in the next one week.

ERC’s Director General Kaburu Mwirichia said international prices of crude oil and the average mean exchange rate, two significant determinants of fuel prices, were on a positive trend during the period November to December 2011.

“Taking these trends into account, the next price review due on 15th January 2012 is expected to result in the reduction of pump prices. The exact reductions will be announced after the calculations are finalized," said Mr Mwirichia.

The Free On Board price of Murban crude oil lifted in December was posted at US $ 111.655 per barrel which was 2.3 percent lower than the price of US $ 114.35 posted in November 2011.

Over the same period the average Free On Board prices of Super petrol, Kerosene and Diesel reduced by 1.5 percent, 4.1 percent and 3.7 percent respectively.

The average mean exchange rate improved by 7.4 percent from Sh93.64 to the dollar in November to Sh86.66 December 2011.

There has been a steady drop of fuel prices in the last one month following the strengthening of the shilling against the major international currencies.

During the December 2011 review, ERC reduced petrol prices in Nairobi by Sh5.07, diesel by Sh3.33 while kerosene prices dropped by Sh4.13 per litre.

However, the country is likely to suffer reduced export earnings if the Europe slides into a recession. It is a major export market for Kenya’s agricultural commodities and especially flowers, fruits and vegetables.

Already, the International Monetary Fund (IMF) has warned that the crisis can trigger another round of global financial crisis that would be worse than the pervious one in 2008.