CONSTRUCTION INDUSTRY OUTPUT GROWTH RATE RESPONSE TO INFLATION RATE IN KENYA

Abstract

Construction industry is a key sector in a nation’s economy, and therefore, understanding the effects of inflation on this industry can enable policymakers to ensure its stable growth and contribution to Kenya’s Gross Domestic Product (GDP). This study presents empirical findings on the impact of inflation rate (IR) on construction output growth rate (COGR) and its implications for policy formulation. A time series data analysis approach was employed, using data from the Kenya National Bureau of Statistics (KNBS) and Central Bank of Kenya (CBK), covering 47 years (1977–2023). Data was analysed using EViews version 10, incorporating graphical analysis, correlation analysis, stationarity tests, and regression analysis. Construction output growth rate (dependent variable) was regressed against the inflation rate (independent variable) using second-difference transformations. Results showed that IR had no immediate significant impact on the growth of Kenya’s construction industry, as indicated by a coefficient of determination (R²) of 0.000043. However, a lagged regression model demonstrated a stronger explanatory power, with an R² value of 0.594232, suggesting that inflation influences construction output growth with a time lag. These findings highlight the delayed effects of inflation on the industry and provide insights for economic and policy interventions.