Kenyan businesses are absorbing rising production and operating costs rather than fully passing them to consumers, fearing higher prices could weaken demand and drive customers to cheaper competitors, a survey of corporate managers suggests.

The strategy, aimed at protecting sales volumes, is squeezing profit margins and exposing firms to a difficult trade-off as fuel, transport and raw-material costs continue to rise.

The Central Bank of Kenya’s July 2026 CEOs Survey found that business managers expect purchase prices to remain high, driven by fuel, energy and raw-material costs and geopolitical developments linked to unresolved conflicts in the Middle East.

However, businesses are reluctant to raise selling prices because households have become increasingly sensitive to price changes after years of high living costs and weak purchasing power.

“Sales prices are expected to remain largely unchanged, owing to limited ability to pass higher costs to consumers due to price-sensitive demand,” CBK said in its survey. The CBK warned that the inability to transfer higher costs to customers “is expected to continue squeezing firms’ profit margins”, signalling growing pressure on corporate earnings.

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The findings were supported by the July Stanbic Bank Kenya PMI, which showed business costs were still rising as companies slowed price increases for customers. The PMI found that 37 per cent of monitored companies in key sectors such as agriculture, manufacturing, construction, wholesale, retail and services experienced higher input prices in July, while less than one per cent reported a decline.

The cost of buying goods and materials rose at the fastest rate since November 2023, with companies in the PMI surveys attributing the increase to higher fuel and transport costs and material shortages caused by the Middle East conflict.

The PMI findings showed that about 15 per cent of companies raised their prices in July, as most firms left prices unchanged to protect sales and profit margins.

Stanbic Bank economist Christopher Legilisho said the divergent movements showed businesses were being forced to make difficult choices between protecting demand and preserving profitability. “Output price inflation softened, even as input cost pressures remained elevated, implying that some firms absorbed costs to protect demand, while others remained focused on preserving margins,” Mr Legilisho said.

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His assessment points to a growing disconnect between the cost of doing business and prices charged to customers, with companies increasingly absorbing shocks that would previously have been passed down the supply chain.

“The July PMI suggests that demand is beginning to recover but cost pressures and logistics bottlenecks are still constraining activity,” Mr Legilisho said.

The pricing squeeze comes as CEOs expect business activity to improve for the remainder of the year, supported by higher demand, stronger sales and increased production volumes.

CBK said firms anticipate improved activity from seasonal factors, including peak tourism from July to September, agricultural harvests, production cycles, marketing efforts, capacity expansion and increased activity following government budget releases.

However, high operating costs, weak consumer purchasing power, geopolitical uncertainty and the high cost of living remain major threats to the recovery across the economy in the coming months.

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cmunda@ke.nationmedia.com