Workers’ pain as fuel prices push inflation to 28-month high

The jump in inflation will hit workers hard amid reports that the rising cost of living has wiped out the marginal pay rises employers have offered staff in the past five years.

Inflation is now close to the upper end of the government’s preferred range of 2.5 percent to 7.5 percent.

The spike in energy costs is expected to reduce the Central Bank of Kenya’s room for further cuts on the benchmark interest rate, potentially freezing the recent decline in lending rates.

The central bank is ⁠due to announce its next interest rate decision on June 9, after leaving its key rate unchanged at its April meeting.

KNBS said transport costs rose 16.5 percent, while food and non-alcoholic beverage prices increased 9.4 percent. Housing, water, electricity, gas and other fuel costs rose 3.4 percent, driving up the overall cost of living in May.

The three categories account for 57 percent of the basket used to measure inflation.

Workers’ purchasing power has declined by up to 12 percent over the past five years due to rising taxes, multiple statutory deductions and the high cost of living, according to Kenya Bankers Association (KBA) estimates.

KBA, which is proposing a uniform five percent reduction in pay-as-you-earn (PAYE) across all income tax bands, says the purchasing power has fallen by between 10.7 percent and 12 percent, contributing to the broader slowdown in economic growth.

The statutory deductions cited by KBA include PAYE, the 1.5 percent Affordable Housing Levy, a 2.75 percent contribution to the Social Health Insurance Fund (SHIF), and higher National Social Security Fund (NSSF) contributions, which now top Sh6,480 per month for higher earners.

Workers’ pay packets are shrinking relative to inflation, with the energy shock triggered by the Iran war derailing recovery in real wages.

Workers have seen their real wages drop to Sh56,566 last year from Sh62,256 in 2020.

The Middle East conflict has worsened the cost-of-living crisis, with inflation reaching 6.7 percent, exceeding the CBK’s forecast that it would hit 6.2 percent in July amid costly fuel.

Kenyan households and businesses are feeling the weight of record-high fuel prices as the Middle East conflict disrupts global oil markets, effectively pulling the country into a crisis unfolding thousands of miles away.

Since the US-Israel war with Iran started on February 28, 2026, the price of a litre of petrol has gone up by 20.2 percent,  while diesel and kerosene prices have risen by 39.8 percent and 25.3 percent, respectively.

The latest 16.5 percent increase in transport costs came despite the government halving value-added tax on fuel to eight percent during the month and reducing the price of diesel by Sh10 per litre following widespread protests.

The conflict-driven disruptions pushed the price of petrol to a record Sh214.25 per litre in Nairobi, while diesel and kerosene rose to Sh242.92 and Sh152.78, respectively. Following the protests, the government reduced the price of diesel by Sh10, while the price of kerosene increased by Sh38.60.

President William Ruto recently directed the energy regulator to cut the price of diesel by a further Sh10 in the next review on June 14. However, with global oil prices remaining elevated, the reduction may require increased use of fuel subsidies.