INFLATION TARGETING AND ITS EFFECT ON FOOD PRICE VOLATILITY IN KENYA
Abstract
Purpose of Study: The study investigates the effectiveness of inflation targeting in stabilizing food prices by examining its impact on food price volatility and the broader economic factors influencing this instability, including global commodity prices, exchange rate fluctuations, climate variability, and regional conflicts. Inflation targeting, introduced by the Central Bank of Kenya in 2011, aims to control inflation and stabilize prices.
Problem Statement: Despite achieving its overall inflation objectives, Kenya continues to face volatile food prices, posing significant socioeconomic challenges, especially for low-income households that are heavily burdened by high food costs.
Methodology: The study aopted non-experimental research design with secondary quarterly time series data from 2011 to 2022 sourced from the Central Bank of Kenya, Kenya National Bureau of Statistics, and the Food and Agriculture Organization, this research analyzes factors including the Consumer Price Index, exchange rates, and food prices using a Vector Error Correction Model (VECM).
Result: The findings indicate that, while inflation targeting has succeeded in controlling overall inflation, it has struggled to reduce food price volatility. This suggests the need for more comprehensive policies that go beyond traditional monetary strategies to stabilize food prices effectively.
Conclusion: The results highlight the necessity for a multifaceted approach involving monetary, fiscal, and trade policies to manage food price dynamics, improve food security, support farmers' incomes, and enhance overall economic stability in Kenya.
Keywords: Inflation targeting; Food price volatility; Monetary policy; Economic stability; Food security
References
Bernanke, B., and Mishkin, F. S. (1997). Inflation-targeting: A New Framework for Monetary Policy? Journal of Economic Perspectives, 11(2), 97-116.
Braun, J., and Tadesse, G. (2012). Global Food Price Volatility and Spikes: An Overview of Costs, Causes, and Solutions. ZEF-Discussion Papers on Development Policy No. 161, 1-42.
Central Bank of Kenya (CBK). (2021). Historical trend of inflation in Kenya. https://www.centralbank.go.ke/rates/inflation-rates/
Durevall, D., and Sjö, B. (2012). The dynamics of inflation in Ethiopia and Kenya. African Development Bank Group.
Durevall, D., and Ndun’gu,S.(1999). A Dynamic Model for Inflation in Kenya:1974-1976 (Working Paper No 99).Washington: International Monetary Fund.
Kenya National Bureau of Statistics (KNBS). (2022). Consumer Price Indices Review by Kenya National Bureau of Statistics. https://www.knbs.or.ke/consumer-price-indices-and-inflation-rates-for-august-2022/
KIPPRA. (2020). Kenya Economic Report 2020.
Krušković, B. D. (2022). Central Bank Intervention in the Inflation Targeting. Journal of Central Banking Theory and Practice, 1, 67-85.
Lidiema, C. (2020). Trade Openness and Crude Oil Price Effects On Food Inflation: Examining The Romer Hypothesis In Kenya. Journal of World Economic Research, 2(9), 91.
Meerza, S. I. (2020). Do Preconditions of Inflation Targeting Framework Matter? International Journal of Economics and Finance, 12(5), 51-67. https://doi.org/10.5539/ijef.v12n5p51
Nabbosa, O. (2017). Inflation targeting lite regime in Uganda: how effective is inflation targeting lite as a monetary policy framework in reducing inflation and inflation volatility? Lund University, School of Economics and Management, 1-51.
Ndirangu, L., and Ngugi, R. W. (2015). Food price changes and consumer welfare in Kenya. Journal of African Economies, 24(1), 1-18.
Oduor, J., C, N., Ruto, R., and Abdillahi, U. (2021). Effect Of Inflation On Growth Of Manufacturing Sector In Kenya (2008-2017). Asian Journal of Economics Business and Accounting, 17-34.
Okwori, J., and Abu, J. (2017). Monetary policy and inflation targeting in Nigeria. International Journal of Economics and financial management, 2(3), 1-12.
Wanjuki, T. and Muriithi, D. (2022). Evaluating the Predictive Ability Of Seasonal Autoregressive Integrated Moving Average (Sarima) Models Using Food And Beverages Price Index In Kenya. European Journal of Mathematics and Statistics, 2(3), 28-38.
Were, M., Nyamongo, E., Kamau, A. W., Sichei, M. M., and Wambua, J. (2014). Assessing the effectiveness of monetary policy in Kenya: Evidence from a macroeconomic model. Economic modelling, 37, 193-201.
World Bank. (2019). The World Bank in Kenya. https://www.worldbank.org/en/country/kenya/overview
World Bank. (2022). The World Bank in Kenya. https://www.worldbank.org/en/country/kenya/overview
Surya, A. (2016). The impact of an inflation targeting framework on food price inflation: evidence from developing economies. SSRN. http://dx.doi.org/10.2139/ssrn.2873062
