Raising prices is fair game for firms

shopping

A filled shopping cart at a supermarket in Ahlen, western Germany on March 19, 2020. 

Photo credit: Ina Fassbender| AFP

If you pass by your local shop today to buy a two kilogramme packet of your favourite unga brand, it will cost you an average of Sh105.

While the relatively high price could peeve you momentarily if you also happened to be the same customer under four years ago when the same was retailing at as low as Sh80, then chances are you might forget to ask yourself a simple but important question – who set this price?

The simple answer would be, of course, the shopkeeper. A kiosk owner can decide to sell you the packet for a few shillings more or less depending on the competition.

But in truth, it is more complex than this. To set that price, he will consider many things, including that at which he bought the flour from the manufacturer or wholesaler, the costs incurred along the way, and then his profit margin.

But if the shopkeeper wakes up tomorrow to find that the manufacturer has raised his prices for one reason or another, he will follow suit, underlining the importance of producer prices.

Data from the Kenya National Bureau of Statistics (KNBS) shows that manufacturers have increased prices of their goods by 7.73 per cent in the period between October last year and this year, and 2.07 per cent over the past month, piling pressure on retail charges.

Food processors

The Producer Price Indices (PPI) for the third quarter of the year shows food processors, clothes, medicine and electronics makers are among those that have most increased their prices over the period.

This after food processors increased their wholesale prices by 5.27 per cent in September this year from the same period last year.

Food firms make up about 37.3 per cent of the entire manufacturing industry, and an increase in wholesale prices are a blow to consumers as the cost of living continues to rise.

Kenya rebased the PPI last year due to changing production patterns, with the index a key metric of tracking how much of inflation borne by consumers of products originates from the manufacturer before taxes and supply chain costs are included.

Manufacturers adjust their prices due to various reasons, including change in quality, its packaging, labour, capital, operation, and imports costs, or as a response to market competition.

“The third quarter year on year producer inflation was 7.73 per cent in September 2021 compared to 0.17 per cent in September 2020. The index rose from 102.43 in September 2020 to 110.35 in September 2021,” KNBS Director-General Macdonald Obudho said.

Meanwhile, producers of pharmaceuticals and medicinal chemicals raised their sale prices by 13.95 per cent in that period, leading to a higher cost of medicines that have made healthcare more expensive. Electronics and electrical equipment manufacturers also increased their sale prices by 11.98 per cent, plastics and rubber makers raised their prices by 7.86 per cent, leather products makers by 8.13 per cent, while clothes manufacturers raised their prices by 11.36 per cent.

Reinforced bars

But those who raised their prices the most are manufacturers of metals such as iron and steel, who increased their sale prices by 31.69 per cent, dealing a heavy blow to sectors that rely on the materials especially the construction.

The effect of this is shown by a separate set of Construction Input Prices Index (CIPI) data from the statistics body that tracks the prices of inputs used in the sector over time.

It shows the CIPI for steel and reinforced bars, which make up about 10.69 per cent of building costs, rose sharply to 126.87 between March and June, up from 120.78 in the preceding quarter.

Mr Manish Mehra, the business lead at Mabati Rolling Mills (MRM) said in an interview last month the steep cost of steel is caused by disruptions in global supply especially due to travel restrictions at the height of the Covid-19 pandemic last year.

“In mid last year, steel cost about $600 (Sh66,000) per tonne but has doubled and we are currently importing it at $1,200 (Sh133,000) for a tonne. This is because our source markets, which are primarily Japan, China and South Africa are having muted production due to efforts by their governments to cut on use of coal, especially China,” he said.

While not the only cause of increase in consumer prices, the rise in producer prices forms a critical part of consumer price increases Kenyans have borne over the past year, with the year-on-year inflation hitting 6.45 per cent last month.

Consumer Price Index (CPI) for October, which shows change in actual prices paid by buyers, shows the cost of food and non-alcoholic beverages has risen 10.6 per cent between October last year and last month.

At the same time, the cost of housing, water, electricity and other fuels rose 5.8 per cent during that time, alcohol and tobacco increased by 3.27 per cent, transport by 8.15 per cent, and clothing and footwear by 2.45 per cent.

The PPI is also critical to measuring how prices of inputs used by manufacturers affect their production and are therefore key to informing crucial government decisions.

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