Higher money supply lifts core inflation to 3 percent

Core inflation measures the changes in prices of goods and services beyond the more volatile food and fuel, and is therefore a critical indicator of underlying demand side price pressures in the economy.

It has gone up for four straight months, in contrast to non-core inflation which has now declined to 6.2 percent from 8.4 percent in April due to stable food and falling fuel prices.

This therefore indicates that the increase in core inflation is as a result of the improved money supply in the economy, rather than second round or knock-on effects of higher food and fuel prices.

“Higher credit uptake buoyed this position further as highlighted by a two percent growth in (private sector) credit in May, up from 0.4 percent in the month prior,” said analysts at NCBA in a note on the June inflation numbers.

The KNBS consumer price index (CPI) for June showed that the biggest price increase among the core indicators was on health services, whose prices rose by 3.7 percent year on year, followed by clothing and footwear prices with an increase of 3.5 percent.

Restaurant and accommodation services followed with a price increase of 3.3 percent, with personal care, social protection and miscellaneous goods and services prices also going up by a similar margin.

In the CPI basket, the non-food-non-fuel segments carry a combined weight of 52.49 percent, with food and non-alcoholic beverages having the biggest individual weight at 32.9 percent, followed by housing, water, electricity, gas and other fuels at 14.61 percent.

For the Central Bank of Kenya (CBK), whose primary mandate is price stability in the economy, core inflation helps measure more accurately the impact of its monetary policy actions which are designed to either increase or reduce the supply of money in the economy.

The CBK has in recent months eased monetary policy by cutting the base rate from 13 percent in August 2024 to 9.75 percent in June 2025, largely in a bid to stimulate private sector borrowing that had by the end of last year been contracting on an annualised basis.

Read: CBK pushes for lower loan costs in sixth rate cut

The CBK also saw room to cut rates due to the stability of the shilling against the dollar, where the local unit has traded at the Sh129 level to its US counterpart for the last 10 months. Headline inflation has also held below the preferred mid-point of five percent for the last 13 months.

While the CBK has a preferred target of five percent plus or minus 2.5 percentage points for overall inflation, it does not have an official target for core inflation, even though it is said to prefer that this inflation goes no higher than three percent.

According to the monetary authority, core inflation of about three percent is consistent with overall inflation of five percent.

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