This is how we can manage inflation, stabilise economy

Kenya’s Gross Domestic Product (GDP) is estimated to have rebounded by an impressive 7.5 per cent in 2021 compared to a 0.3 per cent contraction in 2020, based on the recently released 2022 Economic Survey report.

This clearly shows the accelerated recovery in global trade, services and industrial sectors from the Covid-19 pandemic. The monetary policy stance of maintaining the Central Bank of Kenya rate at 7 per cent was fundamental in stimulating and accelerating overall economic recovery.

Global inflation rose to 4.3 per cent in 2021 from 3.2 per cent in 2020, which was attributed to supply chain disruptions, increase in prices of energy and agricultural commodities.

In Kenya, inflation rose to 6.1 per cent from 5.4 per cent in 2020. The world GDP recorded a 5.9 per cent growth from a 3.1 per cent contraction in 2020.

However, the current inflation pressures could dampen future economic outlook. Economists have referred to this period as ‘the return of inflation’ and ‘The Great Inflation Era’.

Notably, the rising prices, especially for food and fuel have attracted much attention of all stakeholders across the sphere. This high cost in the household basket of commodities has affected what you buy.

Geo-political developments have spillover effects on domestic developments in a country. Russia’s invasion of Ukraine, has had far-reaching tremendous economic impacts especially placing additional upward pressure on energy and food prices.

Globally, workers’ wages have declined because of inflation. This is a worrying trend, particularly to households in the bottom of the economic pyramid who remain vulnerable to this shocks.

Inflation impacts different groups differently such as banks, the stock market, workers, lenders and borrowers stop, which it may be desirable or undesirable. Concerns about inflation in advanced and emerging market economies has raised eyebrows among policy makers and institutions.

In the US, inflation has reached its highest level since 1982. This is partly due to global disruptions in supply chains fuelled by the Russia-Ukraine war.

In its May 13 bulletin, the Central Bank of Kenya indicated that US inflation was at 8.3 per cent in April. The US Federal Reserve deserves a round of applause for the aggressive monetary policy tightening through raising the interest rates and reduction in the balance sheet to curb the inflationary pressures.

Inflation should be maintained within reasonable limits to spur economic growth and stabilise the economy, given any circumstances which may occur such as war, sanctions or a pandemic.

For example, the US Federal Reserve seeks to maintain an inflation rate of two per cent over the long run.

Kenya has a forward-looking monetary policy that works to contain inflation within a range of 2.5 per cent on either side of the five per cent medium term target using interest rates.

The IMF April 2022 World Economic Outlook report, projects inflation at 5.7 per cent in advanced economies and 8.7 per cent in emerging market and developing economies in 2022.

Despite the uncertainty in the future of the economic outlook, the CBK must walk the tight rope between tackling inflation pressures and safeguarding the economic recovery achieved so far.