The Relationship Between International Diesel Price and the Inflation Rate in Kenya

Abstract

Higher oil prices can lead to higher inflation, lower corporate profits, higher unemployment and reduced national economic growth. Higher price volatility can lead to a reduction in investment, leading in turn to a long term reduction in supply, higher prices, and even reduced macroeconomic activity. Kenya solely relies on oil imports to satisfy its oil energy needs, crude oil prices are not the sole determining factor for diesel prices. Increasing price levels, high price volatility and the suspicion of collusive behavior are important topics of public debates on competition in retail gasoline markets in many countries, the study sought to establish if the international diesel price affects the country’s inflation rate and to which extent. The study adopted experimental survey method, the research adopted quantitative, secondary time series data co-integration test is adopted to determine whether the linear combination of the series possesses a long run equilibrium relationship, granger causality test was adopted to test short run relationship between dependent and independent variables. The study the correlation matrix and regression fail find the perfect relationship between the variables and granger causality test also confirms that there is no short term relationship; the study concludes that the hike in international diesel oil price does influence the domestic inflation rate as suggested by monthly data of variables. The study recommends that energy regulatory commission need to institute measures that will effectively forecast on future changes in international fuel prices. The central bank should constantly cheep in to keep dollar circulation level at appropriate levels. The research established that an increase in interest rate would cause increase in inflation rate in Kenya, therefore the study recommends that CBK should consider maintaining interest rates at considerable levels to avoid economic sabotage.