Kenya's private sector activity shrank for a third straight month in May, hurt by a general rise in costs for both businesses and their customers, a survey showed on Thursday.

The Stanbic Bank Kenya Purchasing Managers' Index fell to 46.6 in May from 49.4 a month earlier. Readings above 50.0 indicate growth in business activity, while those below that signal contraction. The May figure was the fastest drop since July 2024.

"When explaining the latest drop, panellists remarked on demand weakness, inflationary pressures and shortages of new work. Manufacturing bucked the wider trend and was the only sub-sector to see growth," Stanbic Bank said in comments accompanying the survey.

Inflation rose to 6.7% year-on-year in May from 5.6% in April, hitting its highest in more than two years largely due to fuel price hikes linked to the Iran war.

Kenya's statistics office said in late April it forecasts the economy will expand 4.9% in 2026, compared with 4.6% last year.

"Inflationary pressures have intensified, constraining demand conditions, with input prices, purchase costs and output prices driven up by higher fuel and transportation costs. Still, despite subdued business momentum, firms remain optimistic about future conditions," Christopher Legilisho, economist at Stanbic Bank, said.