Manufacturers are worried they will be stuck with their products if they continue to increase prices even as the cost of production surges.
A survey by the Central Bank of Kenya (CBK) showed that manufacturers are taking a hit, accepting lower profits to continue selling their goods.
CBK data showed that despite halting price increases, manufacturing turnover is at a five-month low as retailers and wholesalers struggle to offload their inventory.
“Manufacturing sector respondents were concerned over declining profit margins amidst rising input prices,” CBK said.
Inflation has become the biggest threat facing the country following a sharp rise in oil prices, a flurry of new taxes and failed rains that have disrupted agriculture.
Overall inflation stood at 6.6 per cent in August compared to 6.5 percent in July, largely due to increases in fuel and food prices.
Central Bank says the lower production by manufacturers due to low demand and lower consumption by customers as they tighten their belts will help tame the rising prices of goods within the 7.5 per cent target range.
“Inflation is expected to remain within the target range with muted demand pressures,” Dr Patrick Njoroge said during the MPC.
Kenya authorities expect a slump in agriculture due to lower than average rainfall in the first half of the year as well as the impact of high transport and energy prices on inflation and the economy.
Fuel inflation remained elevated at 9.2 per cent largely due to the impact of the rise in international oil prices.
Food inflation increased to 10.7 per cent from 9.1 per cent, mainly reflecting higher prices of tomatoes, cabbages, Irish potatoes, cooking oil (salad), meat on bone and bread.
This was mainly attributed to dry weather conditions and supply constraints.
The Energy and Petroleum Regulatory Authority (Epra) estimates that oil imports are currently coming into the country at $72.34 a barrel, up from $66.70 previously, and an estimated $42.35 a year ago.
Global oil prices have since shot up to $80 a barrel signaling tougher times ahead for consumers.
The Kenyan shilling has hit a nine-month low of Kes110.2 units against the dollar on higher import bill due to oil prices and global strengthening of the greenback.
Decline of the shilling is likely to lead to imported inflation where the prices of goods may rise as traders need more local currency to buy imports.
The decline also piles pressure on the already unsustainable debt levels requiring more units of the Kenyan shilling to service dollar debts. Kenya holds Kes4 trillion in dollar denominated debt.