The current inflation rate in Kenya which is approximately 19% is worrying. Our politicians are not telling the common person what this means, and how will it affect them. The common person does not even know what inflation is, a part from that term, which many are not able to explain what it really means. The rate at which inflation grows is not the same rate incomes are growing. Economists usually use the rule of 70 to estimate how long it will take a country's growth to double. For example, if a country's economy is growing at say 5% per a num, it will take 14 years(70/14) for that country's growth to reach 10%, assuming it is growing at the same rate. In finance, they use the rule of 72 to estimate how long it will take to double your money in any investment, and is also used to to figure out the cost of living, since inflation grows at a compound rate.
For example, to find the number of years required to double one's retirement nest egg or any money at a given interest rate, divide the interest by 72. An example- if one has shs. 100000/= in the bank, an dthe bank pays interest at 8%, this money will double(200000/=) in about nine(9) years , while at an interest rate of 10%, it will take approximately seven(7) years. Now if two people buy a house for say shs. 500000/= each, and after two years, one sells the house and after five years, another sells his or hers for shs. 1000000/= each. Both have made a profit of shs. 500000/=. By applying the rule of 72, both houses appreciated at different rates. The one who sold after two years, the house appreciated at 36%(72/2), while the one who sold after five years, the rate was 14%.
Now let us come to our case in Kenya where inflation now is about 19%.This rate is too high, and people are not going to manage life with this kind of inflation.The cost of living is going to double at a very short period(72/19)- after every 3.7 years.Will incomes grow at this rate?Most countries' inflation rates are not more than 5%, whereas ours is 19%.A country whose inflation rate is 5% will have its cost of living double in about 15 years. Translated in really world terms, a person who is living in Kenya, whose income now is say shs.50000/=, will require shs. 100000/= in 2015 to buy the same goods and services he or she is buying now with shs.50000/=.Are our incomes/salaries growing at that rate? NO. Our incomes have never gone up, and that is why workers are striking all over. It is high time people know how inflation affects their incomes.
David Machoka, MBA, MCIPS(UK).