Inflation: the Kenyan Case

Topics: Inflation, Monetary policy, Money supply Pages: 20 (5883 words) Published: October 8, 2011
A Discussion Paper

Inflation in Kenya: A Case study of Rising commodity Prices

Silas Oger Andanda

August 29, 2011

Many Kenyans have been suffering since January 2011 as a result of deteriorating quality of life due to continuous rising prices of basic commodities. The consumer price index (CPI) had rised by approximately % from 123.5 in January 2011 to 173.45 in July 2011. The month-on-month inflation increased from 9.26% in January 2011 to 18.34% in July 2011. The changes in the CPI reflect the changes in the cost of living of consumers. Overall inflation rate rose in July to 15.53 percent year-on-year from 14.49 percent in June, driven by higher food prices and rises in other items including housing. The situation is not to ease soon, going by the words of The Central Bank Governor Njuguna Ndung’u, “A pilot would say: we are experiencing turbulence, fasten your seat belts and we all ride over the storm or turbulence.” What factors are responsible for the resurgence of food and fuel prices? How should the factors be addressed? What should Kenya do to handle the resurgence of food and fuel crisis? Analysts also view it the same way and expect inflation to continue rising, “I don’t see inflation relenting in the next few months …(because) it is attributed to high oil prices which we have no control over and food prices due to drought,” said John Mutua, the program officer at institute of Economic affairs.

The sharp rise in inflation is attributed to rise in food and fuel costs which resulted in a sharp rise in the prices of goods and services in the local market. The government appears to have lost control of inflation as it stood at 14.5% as at July 2011. The IMF had warned in May that the short – term priority for East Africa’s biggest economy was to curb Inflation. Rising consumer prices are pushing people deeper into poverty by forcing them to dig deeper into their pockets to feed their families. The high prices has forced consumers to reduce their consumption levels of varying goods and services as a result of the high cost of living which is mainly driven by inflation. The rising prices severely affect the lower and middle income groups and the rising concern for many Kenyans at this time is the rising cost of many basic necessities. The high cost of basic necessities such as maize flour has become the main driver of inflation in the economy because of high expenditure on them by the majority of the households.

Whereas the foodstuff basket of the rich households mostly comprise luxury food items, the food basket for the poor households mainly comprise necessities with such food items as maize flour, vegetables and sugar. This makes the poor households very vulnerable because once prices of such items rises, they can’t avoid paying the higher prices. Most of the poor households who live in less than a dollar per day can not afford to by a packet of maize flour at the current prevailing market price of Ksh.140.

For us as a nation to be able to find a solution out of our present crisis, it is vital to first understand inflation, know how it is measured, what causes it, its effects and how we can correct it. That is what forms the basis of this paper.

What is inflation?
Inflation is a situation where the general prices of goods and services in a particular economy are persistently and significantly rising over a period of time. There is no generally accepted definition of inflation and different economists define it differently. Harry G. Johnson states “I define inflation as substantial rise in prices.” In the words of Gardner Ackley, “Inflation is a persistent and appreciable rise in the general level or average of prices.” When prices of commodities increase, the value of money and its purchasing power falls therefore according to Crowther, inflation is a “state in which the value of money is falling, i.e. the...
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