Effects of Inflation: Case of Kenya
INFLATION
Inflation is a term that refers to a persistent increase in general price levels of goods and services over a given period of time. The rise in inflation is mainly attributed to rise in food and fuel costs which results in a sharp rise in the prices of goods and services in the local market.
MEASURING INFLATION
Consumer Price Indices
Inflation rate is calculated as the rate of change in consumer price indices from one period to another. Periods can be yearly or monthly.
Pa-(Pa-1)Pa-1×100Where:
Pa is the price in the current year or month
Pa – 1 is the price in the previous year or month
GDP Deflator
The GDP Deflator is another price index that is used to measure inflation. It shows how much of the change in GDP from a base year is reliant on changes in the price level. The GDP deflator is calculated by dividing the nominal GDP by the real GDP.
STAGES OF INFLATION
Creeping or mild inflation – ranges between 3-5% but does not exceed the single digit.
Walking inflation – also called Trotting inflation ranges from 7-10%
Galloping inflation- Hyperinflation or runaway inflation is the double digit inflation.
ANALYSING THE CONSEQUENCES OF INFLATION
Effects of inflation can be categorised into two, i.e. group of effects caused by Anticipated Inflation and Unanticipated Inflation. Anticipated Inflation is the rate of inflation that consumers and economists predict from year to year. The effects of inflation caused by anticipated inflation are mainly inconveniences to consumers and producers. On the other hand, unanticipated inflation is that rate of inflation which greatly differs from that which economists and consumers predicted. When such a situation arises, the effects go way beyond inconvenience.
The major inconveniences experienced due to anticipated inflation include the shoe leather costs and menu costs. Originally, the shoe leather cost described the lessening of the time it takes shoes to wear out due to the increase of trips made to
Inflation is a term that refers to a persistent increase in general price levels of goods and services over a given period of time. The rise in inflation is mainly attributed to rise in food and fuel costs which results in a sharp rise in the prices of goods and services in the local market.
MEASURING INFLATION
Consumer Price Indices
Inflation rate is calculated as the rate of change in consumer price indices from one period to another. Periods can be yearly or monthly.
Pa-(Pa-1)Pa-1×100Where:
Pa is the price in the current year or month
Pa – 1 is the price in the previous year or month
GDP Deflator
The GDP Deflator is another price index that is used to measure inflation. It shows how much of the change in GDP from a base year is reliant on changes in the price level. The GDP deflator is calculated by dividing the nominal GDP by the real GDP.
STAGES OF INFLATION
Creeping or mild inflation – ranges between 3-5% but does not exceed the single digit.
Walking inflation – also called Trotting inflation ranges from 7-10%
Galloping inflation- Hyperinflation or runaway inflation is the double digit inflation.
ANALYSING THE CONSEQUENCES OF INFLATION
Effects of inflation can be categorised into two, i.e. group of effects caused by Anticipated Inflation and Unanticipated Inflation. Anticipated Inflation is the rate of inflation that consumers and economists predict from year to year. The effects of inflation caused by anticipated inflation are mainly inconveniences to consumers and producers. On the other hand, unanticipated inflation is that rate of inflation which greatly differs from that which economists and consumers predicted. When such a situation arises, the effects go way beyond inconvenience.
The major inconveniences experienced due to anticipated inflation include the shoe leather costs and menu costs. Originally, the shoe leather cost described the lessening of the time it takes shoes to wear out due to the increase of trips made to
References: http://www.knbs.or.ke/http://economics.uonbi.ac.ke/node/2108http://sabahionline.com/en_GB/articles/hoa/articles/features/2012/03/23/feature-02http://bankinginkenya.com/494/effects-inflationhttp://www.studymode.com/essays/Inflation-The-Kenyan-Case-797838.htmlhttp://tutor2u.net/economics/revision-notes/a2-macro-consequences-of-inflation.html