Eyes on retailers as average cost of factory inputs drops
Production costs are one of the biggest determinants of the prices that manufacturers set for their products.
What you need to know:
- Production costs are one of the biggest determinants of the prices that manufacturers set for their products.
- The year-on-year drop in the cost of raw materials comes at a time when inflation has dropped to a 12-year low.
The national Producer Price Index (PPI), which measures the average change in prices that domestic producers receive for their output, dipped to 135.24 points last month compared to 140.35 a year ago — handing relief to factories and turning the spotlight on retail prices of goods.
“Over the year ending September 2024, the industrial sectors namely mining and quarrying; manufacturing; electricity, gas, steam, and air conditioning supply recorded reduction in production prices,” the Kenya National Bureau of Statistics says.
The drop signals a reprieve for manufacturers in the form of lower costs of purchasing materials used in various industries. Production costs are one of the biggest determinants of the prices that manufacturers set for their products.
Mining posted the biggest drop in the PPI with a fall of 7.4 per cent year-on-year, followed by electricity producers with a decline of 7.2 per cent while manufacturers recorded the smallest drop at 3.3 per cent.
The year-on-year drop in the cost of raw materials comes at a time when inflation has dropped to a 12-year low on easing prices of energy, transport, and food, offering relief to Kenyans whose spending power has been hit by increased taxation.
Inflation — a measure of cost of living — dipped to 3.6 per cent last month from 4.4 per cent in August, being the lowest since December 2012. Formal workers and households are feeling the heat of increased taxation, which has hit their payslips, hurting their ability to make orders for goods and services.
But while businesses pass on increases in the cost of raw materials in the form of high retail prices, a fall in PPI does not guarantee reprieve to consumers.
This is mainly because businesses can opt to widen profit margins when the cost of raw materials drops, denying consumers anticipated gains.
The fall in production costs comes at a time the shilling has rallied against the dollar and the cost of fuel has gone down.
The local unit is currently exchanging at 129.19 to the greenback compared to 132 units at the end of May this year, lowering the cost of importing raw materials used by local industries.
A litre of diesel is currently retailing at Sh168.06 from Sh171.6 in Nairobi while that of diesel is going for Sh180.66 from Sh188.84.
A continued drop in the cost of fuel and strengthening of the shilling are key to keeping the PPI on the drop in the coming months and thus keeping inflation on the low.
