Influence of Selected Structural Macroeconomics Characteristics on Inflation in Kenya
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Abstract
Over the past few decades, international commodity pricing, supply chain disruptions, and global economic conditions have affected Kenyan inflation rates. As a result, Kenya faces inflation over the statutory threshold of 5±2.5% despite its economic integration with the global economy. Kenya's inflation averaged 11.31% between 1990 and 2022, 3.81% above the 7.5% upper limit despite the Kenya Central Bank's price stability measures. Consequently, considering the lack of consensus among researchers about the influence of oil price volatility and trade openness on inflation, there is uncertainty regarding the influence of trade openness and oil price volatility on Kenyan inflation, which is attributed to the lack of consensus among researchers. As a result, the present study aimed at determining the influence of selected structural macroeconomic characteristics on inflation in Kenya. Specifically, this aimed to establish trade openness and oil price volatility's influence on inflation in Kenya. This study was modeled on Taylor and Barbosa-Filho's structuralist inflation theory empirical approach, which departs from monetarist views on inflation. The study utilized quantitative correlational research design annual data obtained from Central Bank of Kenya and World Bank websites spanning 33 years from 1990 to 2022. The analysis was conducted using an ARDL modelling approach to establish the short-run and long-run trade openness and the influence of oil price volatility on inflation in Kenya. The findings exhibited a significant positive influence in the immediate term and long run for oil price volatility on inflation. Additionally, the findings revealed an inverse and significant trade openness influence on inflation in the short run. However, trade openness exhibited a negative but insignificant influence on inflation in the long run. The study thus concludes that inflation rate changes in Kenya between 1990 and 2022 primarily reflected the direct and pass-through effects of headline shocks. This study recommends that the government should enhance its energy security by diversifying its energy sources, and local oil companies can employ hedging by using futures contracts in anticipation of rising oil prices to help the government keep consumer prices stable. Additionally, Kenya should continue embracing trade openness policies that encourage imports and exports, fostering a competitive market environment to help keep inflation in check.