Inflation. What is it?

October 02, 2022 - 0 Comments

Inflation is one of the most used words in the field of economics – especially during times of financial crisis – such as now. I bet you have heard someone say “inflation iko juu” or “hii inflation inatumess”. Really, what does that mean? 

I remember a couple of years ago when I was still in high school, I used to hear business people and news presenters use the phrase and I didn’t know what it meant, and I was afraid to ask my colleagues for reasons of fear – that they’ll view me as mshamba. As a result, I continued to bask in the glory of my ignorance. It was only until I overcame that fear that a thought came to me to secretly google what the phrase actually means. To be honest, I couldn’t find a simple definition.

For once, let’s understand what it means – and in simple terms.

Simply put, inflation is the general rise of prices in an economy over time. 

Let’s break it down. People – for example in a country – need various products and services to live a comfortable life; these could be fuel, entertainment, health care, and water, among others. In 2019, Mwalimu Rachel used to buy 1 litre of petrol and 50 grams of rice cakes at 197 KES and 20 KES respectively. In 2022, she is buying the same products at 220 KES and 34 KES. Now, the cumulative price increase in those products (and all other products and services in an economy that Mwalimu Rachel is part of) represents the economy’s inflation. It broadly takes into account all sectors of an economy and is usually represented as a percentage. According to the Central Bank of Kenya,  Kenya’s current inflation rate stands at approximately 8.53% (August 2022). You may want to know how the figure was reached. Lol. Find yourself a good economist and he/she will assist you (be prepared for some mathematical computations!). At least, you should know that you lost 8 KES for every  100 KES you owned in savings in the month of August and what you could buy for 100 KES last month will cost you 109 KES this month.

Hence, inflation can also be defined as a decrease in the value of money and purchasing power.

Inflation is a bad thing in an economy. This is because the price rise causes a unit of money to buy fewer goods and services. For example, 197 KES isn’t enough to buy 1 litre of petrol anymore. Hence, it’s partly due to inflation that people will utter sentiments such as “economy ni mbaya” or “maisha imekuwa ngumu in this economy”. 

What causes inflation? 

There are many causes of inflation. Generally, it is caused by a flux supply of money in an economy. The most common mechanism for this is printing and giving out money. Imagine if a government started to print and give out thousands of shillings to its citizens every month. Say, each citizen is to receive 10,000 KES stipends at the end of every month. This is what will happen: the majority of people won’t go to work (mbona uende job na rent is covered for?), commodities, products, and services prices will plummet; this, in turn, discourages farmers and industries to produce. This leads to a “lazy” economy that can’t sustain itself. 

The central bank is mandated to regulate the money supply in a country to curb inflation.

Inflation can primarily be classified as:

  1. Demand-pull inflation. This usually occurs when demand for goods and services exceeds an economy’s ability to produce them. For example, when more and more people of an economy are in demand of Air Jordan 1s than what the economy itself can produce. This causes the producers to raise their prices.
  2. Cost-push inflation. This results from the increase in the cost of production inputs; which, in turn, increases the price of the final goods and services.

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