The Effect of Oil Price Shocks on Inflation in Kenya

The current empirical study analyses the effects of oil price fluctuations on inflation in Kenya. The study utilized structural vector Autoregressive modelling of the time series to assess the relationship between oil price fluctuations and inflation trends, utilizing time series annual data from 1990 to 2022. The findings of the study were that there exists a Bi-Direction causality between oil price fluctuations and inflation in the country, the SVAR estimation confirmed positive significant effect of oil price fluctuation on inflation trends, the results of the IRF pointed out oil price fluctuation affect the country’s inflation performance and finally the FEVD of oil price fluctuation on inflation reflected that there exist indirect effects of oil price fluctuation on inflation as well as inflation influencing oil price after the third period. Based on these findings we therefore conclude that crude oil price fluctuations contributes significantly to the real inflation in Kenya and hence affecting other sectors of the economy inversely. It is on this ground that we recommend adoption of policies that will reduce this effect on this countries, to start with to reduce the burden the countries should look for alternative locally available source of power that include adoption of Bi-diesel, compressed methane that can be source from sugar cane give the un tapped potential of sugar can in the three countries. In addition, the countries can consider price hedging of oil purchases where the countries enter into contract with their oil supplies for a constant crude oil price over the contract period.