In the old days, people had diplomatic ways of communicating their economic situation.

I remember this was the case when I was young. My mother would say: "My son, things are getting tough. We can no longer afford to apply Blueband on both sides of a sliced bread. Commodity prices have gone up. From now on, just apply on one side.”

That was her way of explaining how inflation had impacted on our consumption. Not that I knew what she was talking about then.

But let us get it right. Inflation is one of those topics that crop up time and time again, and it's one of those issues that make people uncomfortable. It has never been good news.

It's not long since we watched news about inflation on television or read about it in newspapers, but inflation is one of those things that make the world go round.

It repeatedly affects your wallet. Simply put, inflation means the present value of a currency is going low.

In other words, given the same basket of goods, the current purchasing power of money is low compared to some previous periods. It implies that a consumer will purchase fewer commodities now given the same amount of money compared to previous years or periods.

Now, after all these years of reasonable price increases, a lot of Kenyans still can't get used to two big ideas. One is that inflation really is low, despite your impression as a shopper that everything seems to be getting more expensive.

The other is that inflation can be too low. It seems illogical. Why would anyone ever want to pay more for goods?

The truth is that inflation really is low when you take into account everything that you pay for, not just the items whose prices are going up.

The Consumer Price Index rose just 4.8 per cent over the 12 months to October 2014. That's based on prices collected and reported by the Kenya National Bureau of Statistics.

It's even harder for a lot of people to grasp the idea that low inflation is a problem.

One reason low inflation is bad is that when prices don't go up much, workers' pay generally remains stagnant.

It so happens that average hourly and weekly earnings have been rising pretty well over the past year, but that's probably not sustainable, since employers won't forever keep raising their workers' pay faster than they raise what they charge customers.

 

Second, a certain amount of inflation is good for employment because of what economists call money illusion. When demand is slack, employers tend to want to cut their real wage expenses.

They can do that quite easily in times of moderate inflation just by handing out raises that are lower than the rate of inflation. But if inflation is super low, employers would have to cut pay outright to reduce their real wage bill.

Workers naturally hate that, so employers take the easier but arguably crueller way out by laying off workers.

The third reason to worry about low inflation is that it can degenerate into deflation. That's when prices fall consistently, across the board. Deflation discourages consumers from buying because they figure they can get things cheaper if they wait.

It also increases the burden of debt, because the amount you owe doesn't change even though your wages are falling along with everything else.

The Central Bank of Kenya seems to have settled on six per cent inflation as about right, but this institution keeps missing, like archers who for some reason cluster all their arrows on the left side of the bull's eye.

You might think the solution would be to point their arrows a little more to the right, but the Central Bank has been reluctant to take more extreme measures to stimulate growth and raise inflation, fearing that they could create asset bubbles and possibly cause inflation to become too high.

However, Kenya's inflation rate, contrary to what you may think on your next visit to the supermarket, is simply too low.


 

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