Credibility of Kenya's economic data is set to come into sharp focus on Tuesday morning with the launch of a new consumer price index that has a downward bias for measuring the cost of living.

People familiar with the matter told the Business Daily that the Kenya National Bureau of Statistics has reconstituted the consumer price index (CPI) and significantly reduced the importance of household spending on food setting the stage for reduced volatility in the measure for price movement in the economy.

Food now accounts for only 36.04 per cent of the CPI (a select basket of goods and services used to track price movements) - down from 50.2 per cent in the old basket.

The new CPI also comes with new items including airtime, cellular phones, boda boda fares and parking charges for a total of 12 up from 10.

The new index is aimed at reflecting current household spending patterns -- removing the upward bias that has been blamed on arithmetic method used to compute the figures and the importance of food in the old basket.

The month on month inflation for last month was 5.2 per cent in February.

Monthly inflation stood at 4.7 per cent in January down from 5.3 per cent in December helped by the decline in the food segment of the CPI.

Though food prices have remained relatively low in the wake of heavy December and January rains, its effect on the inflation measure in February has been muted by its lower weighting.

Economists said the new basket should further reduce the impact volatility in food prices has had on the cost of living measure -- placing inflation trends within predicable range.

The government released new figures in October, a move that saw inflation drop from a high of 17.9 per cent in September to 6.6 per cent.

Since its launch, policy makers have been at pains convincing consumers that the data reflects the reality on the ground at a time when most Kenyans are feeling the pinch of record surge in retail prices.

"Unless prices come down it is difficult to convince the man on the street that inflation is easing off, although from an analysts perspective its reflective of what is going on in the economy," said Paul Mwai, the CEO of African Alliance.

The World Bank backed the new formula saying it offers a more accurate picture of what is going on in the Kenyan economy.

"It provides a more accurate assessment of price changes creating more certainty for business and labour and adding credibility to the CBK's monetary policy," the bank said as it forecast an annual average inflation of six per cent this year, down from 10.2 per cent last year.

The Government maintains that the new figures should enhance Kenya's investment credentials as opposed to the previous regime that portrayed it as the most inflation prone economy in the region - making price changes the biggest obstacle to selling the country as a favourable investment destination.

It made investors view Kenya as a high-cost production location, they said, giving neighbouring Uganda and Tanzania, with an average annual inflation rate of about seven per cent, competitive advantage.

Uganda's inflation stood at 7.6 per cent in February while Tanzania's was at 8.9 per cent.

Favourable inflation data has also continued to ease the pressure on fund managers running pension funds and other collective investment vehicles such as unit trusts that over the last two years have been posting returns that are way below the inflation levels.

Low inflation figures, however, have weakened the bargaining strength of workers unions who have been pegging the annual pay negotiations with the management on the prevailing rate of inflation.

That could see unionisable workers take home lower annual increments to the delight of employers keen on cutting costs to protect their sagging profit margins under the current difficult economic environment.

The government, the International Monetary Fund (IMF) and the World Bank say that the country will draw in huge economic benefit, especially in attracting foreign direct investors at a time when capital flows have dwindled in the wake of the global economic meltdown.

The IMF expects private capital flow of $722 billion this year in emerging markets, well below the $1.28 trillion that flowed to the markets in 2007 before the financial crisis.

However, the lower inflation figures are set to pile pressure on commercial banks and Treasury to lower interest rates on loans and government securities respectively.

In 2008, most banks reviewed their lending rates upwards by between two and 1.5 per cent citing the high rate of inflation, which stood at nearly 30 pert cent.

These elevated rates have restricted access to credit especially to households, slowing down both production and consumption.

Pressure is also building on Treasury to offer lower rates on government paper, which range between 6.7 per cent and 14.5 per cent depending on maturity of the security, that reflect the reduced inflation figures.

The thinking is that lower inflation numbers have softened investors' expectations.

Since last year, expensive food prices led by the cost of maize flour emerged as the biggest driver of inflation as the country was hit by severe drought and acute supply shortages.

This pushed inflation to a peak of 31 per cent in May last year.

This was higher than the peak levels witnessed in Tanzania and Uganda. Tanzania and Uganda recorded peaks of 14.9 per cent and 14.8 per cent respectively over the past two years.

Both Uganda and Tanzania have been using the new measurement of inflation in line with 2004 recommendations from the International Labour Organisation (ILO) consumer price index manual.