Relationship between Inflation Components and Manufacturing Sector output in Kenya

Abstract

This paper examines the causal linkages and impact of underlying inflationary pressures, specifically core inflation (excluding volatile items), energy inflation and food inflation on the output growth of the manufacturing sector in Kenya over the most recent available period. Using updated annual and quarterly data from the Kenya National Bureau of Statistics and other sources (covering up to 2024/25), we employ a vector-error-correction (VEC) framework to identify long-run equilibrium relationships and short-run dynamics between inflation components and manufacturing output growth. Preliminary findings show that during 2024, the manufacturing value-added growth in Kenya slowed to approximately 4.4%, up from 2.1% the prior year. Meanwhile, headline consumer-price inflation stood at around 4.5% in 2024, with core inflation remaining subdued at about 2.5%-3.0% in early 2025, while non-core inflation (food and energy) rose to double-digit levels (≈9.2% in August 2025). The econometric results suggest that food and energy inflation exert a statistically significant negative effect on manufacturing output growth both in the short run and in the long run, and that core inflation also plays a meaningful role in the long‐run equilibrium. The findings underscore the importance of disaggregating inflation components for industrial policy and monetary policy formulation in Kenya. Policy recommendations include stabilising food and energy prices, strengthening the manufacturing sector’s resilience to inflation shocks, and refining the inflation‐targeting framework to account for sectoral linkages.