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Good news for investors, consumers as inflation dips

FINANCIAL STANDARD
By | March 6th 2012

Odhiambo Ocholla

Inflation figures released last week show the cost of living fell from 18.31 per cent in January to 16.69 per cent last month.

This is the third consecutive month that inflation has slowed down. This is good news to investors and consumers who have endured soaring cost of living, which has crippled families buying power.

It’s good news to shoppers, too, but 16.69 per cent is still away above revised target of nine per cent. It’s too soon to say that November’s 19.72 per cent marked the peak in inflation for this cycle, but nonetheless the drop is good news for those investors waiting for an end to the Central Bank’s war on inflation.

That war has led to several increases in CBK benchmark interest rates and persistent fears that the bank’s monetary policies would slow economic growth.

I don’t think the drop to 16.69 per cent will lead to anything like a quick cut in interest rates, in any case too much of today’s drop could be wiped out by a shift in oil prices.

In my opinion, it will take another month or two of good inflation news to convince financial markets that interest rate increases has come to a temporary end. This decline continues a trend begun last quarter and likely to continue into the next quarter, at least. I expect inflation to keep falling through throughout this year thus providing additional relief to family budgets.

Falling inflation gives the Central Bank’s Monetary Policy Committee (MPC) more opportunity to attempt to boost the economy through quantitative easing and this will be more evident today as the MPC meet to decide on the benchmark Central Bank Rate (CBR) that has been held at 18 per cent for two consecutive meeting.

There is a possibility that interest rates are likely to come down in the near future if the MPC decides to slightly lower the CBR rate against a backdrop of fall in inflation. The fall in inflation reflects the ongoing strengthening of the economy which relieves pressure on prices in general, particularly in the cost of food.

Prices continue to rise and most families are struggling harder every day to put meal on the table. This is the latest economic indicator to suggest a strengthening economic recovery. The CBK has used high inflation figures to justify keeping interest rates high and to consider further quantitative tightening.

What does it mean for investors?

The latest inflation figures are likely to be hailed as ‘proof’ that the inflationary ‘spike’ is over, and will be welcomed by cash-strapped consumers as the cost of living begins to move in the right direction.

Analyst predicts it is likely to keep on dropping for the rest of the year. But the pain continues for workers because inflation remains far above the average pay rise that they are getting. With prices still increasing twice as fast as wages, workers are still getting poorer month-by-month.

High inflation figures had piled inflationary pressure on households in recent months. Further the drop in inflation is definitely good news for the bond markets. Broadly speaking the fall in inflation is good news for your portfolio.

Also fall in inflation would be good news for our stock market, which has suffered from fears of slow economic growth and higher interest rates. Further quantitative easing is likely to support bond prices although naturally there are other factors to consider.

The Consumer Price Index numbers that came out are a blessing for retired investors too. The reason inflation is such a big deal for retired investors is because they are working with a fixed pool of income payout.

While most investors think that bear markets are the biggest threat to their retirement income, history indicates that high inflation has been the main challenge. But inflation hits everyone at roughly the same degree and you can’t do much to escape its effects.

The writer is an investment banker. Email: [email protected]

 

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