The energy regulator opted to shift the burden of higher fuel prices to users of super petrol in the last pricing review, shielding low-income households that rely on kerosene for lighting and cooking.
Diesel, which is mostly used by commercial vehicles and industries, was also spared price spikes.
The Energy and Petroleum Regulatory Authority (Epra) explained that the pricing mechanism announced on Monday placed a cross-subsidy burden on super petrol, which was then used to keep the price of diesel and kerosene artificially depressed.
In the review, the price of petrol, mostly consumed by private cars, went down by a paltry Sh1 a litre to Sh177.30 in Nairobi against projections of a higher drop of at least Sh10 a litre.
Sources told The Standard that the implicit assumption of the energy regulator behind introducing asymmetry in the retail selling prices of petrol vis a vis diesel and kerosene is that petrol is the fuel of the relatively well-off.
However, this price asymmetry has the unintended consequence of hurting private motorists who mainly consume petrol.
"The price of diesel has been cross-subsidised with that of super petrol while a subsidy of Sh17.8 per litre has been maintained for Kerosene in order to cushion consumers from the otherwise high prices,” said Epra Director General Daniel Kiptoo in a statement on Monday.
Diesel, which is used to power commercial vehicles, dropped by Sh1 to Sh162 in the city for the next one month.
The fuel also runs tractors, lorries, agriculture irrigation pumps and captive power generators used in industries.
Kerosene, mostly used by low-income homes for cooking and lighting, similarly dropped by Sh1 to Sh145.94 in the city, according to the monthly prices set by the industry regulator, Epra.
The move by Epra came at a time when the Kenya Kwanza administration is facing mounting pressure to address the high cost of living.
Cross-subsidies are seen as controversial and occur when one group of consumers pays more than the cost of a commodity to subsidise prices for others.
President William Ruto's government faces the uphill task of stabilising government finances and bringing the cost of living under control as unprecedented levels of inflation hurt consumers globally.
Experts warn the new administration will have an uphill task in implementing its colourful campaign promises amid a narrowing fiscal space.
President Ruto removed fuel and maize subsidies on September 13 after being sworn into office, in a bid to trim the fiscal deficit, saying they are unsustainable.
The International Monetary Fund (IMF) and the African Development Bank (AfDB) recently asked developing countries like Kenya to strengthen the social safety nets to protect the most vulnerable citizens.
High diesel prices have raised the cost of transport, mechanised farming and industrial production.
Fuel costs have a direct bearing on inflation, being one of the items in the basket of goods and services whose pricing is tracked to measure the cost of living.
Petroleum prices currently vary across Kenya due to transport costs that reflect how far a location is from the Mombasa port where imported consignments land and are stored.
The sustained high fuel prices are presently having a knock-on effect on the cost of living and doing business in the country, with the price of goods, household energy bills, and transport going up and raising inflation to a five-year high of 9.6 per cent in October.
The economy also uses diesel for electricity generation, meaning that higher prices of fuel automatically result in higher fuel cost charges on power bills.
Producers of manufactured goods are also expected to factor in the higher cost of power in their factories and diesel for the transportation of goods, which are expected to be passed on to the consumer.
Food costs are already elevated due to poor weather conditions and supply constraints, with higher transport charges expected to be loaded onto the final price.
The latest data from the Kenya National Bureau of Statistics shows that inflation rose from 9.2 per cent in September to 9.6 per cent in October on the back of a sharp increase in the prices of essential commodities.
This has forced many households, especially in the low-income segment to reduce their shopping basket.