GROUP ASSIGNMENT
NAME ADM NO. SIGN
1 TITUS WAKABA 2023BS155444
2 ANGELA BORE 2023BS155952
3 DANCAN MUZE 2023BS156371
4 JOAN KAINO 2023BS156139
5 STEPHEN MASINDE 2023BS155690
6 ZACHARY ONDABU 2023BS156042
UNIT : PRACTICE ECONOMIC SKILLS
UNIT CODE : BS/C/7114
DATE SUBMITTED : 13th Oct, 2023
SUBMITTED TO : MELIOTH WAMBUI
TASK : GROUP ASSIGNMENT
EXPLAIN THE CAUSES OF INFLATION IN KENYA AND GIVE
POSSIBLE SOLUTIONS (30 MKS)
CAUSES OF INFLATION
We can easily define inflation as the persistent rise in general price levels alternatively it can also be
defined as the persistent fall in the value of money
Causes of Inflation in Kenya
Causes of inflation are generally grouped into two that is Demand pull inflation and Cost push
inflation.
1. Demand pull inflation. This occurs when aggregate demand for goods exceeds aggregate
supply of goods at current prices thus leading to increase in price levels. Simply explained as
too much money chasing few goods. Factors leading to this are explained below
(a) Increase in demand: rapid in increase in demand for goods and services, may result to
rise in prices of goods and services. Demand for products can increase as a result of
population increase or changes in tastes and preferences.
(b) Increase of money supply: this will lead to increase in disposable income to individuals
which will increase demand for goods and services. In addition, increase in money
supply can be caused by the government resorting to deficit financing or commercial
banks expanding credit.
(c) General shortage of goods and services: reduction of shortage of goods leads to
increase prices of goods and service. This shortage maybe due to reduction of
production, an example of agricultural production in Kenya which keeps changing
depending on the weather conditions.
(d) Increase in government expenditure: through increase in government expenditure,
there is increased supply of money in the economy, hence increasing demand of goods
and services.
(e) Increase in private expenditure: continuous increase in consumption and investment
expenditure in the private sector raises the demand for goods and services and leads to
inflationary rise in price.
(f) Increase in population: Rapid raising in population exerts pressure on the demand for
goods and services.
2. Cost push inflation: is a situation where rise in costs of production push up prices. It is not
associated in demand, but it occurs from the supply side. It is caused by the following
factors:
i. Increase in money wage rates: powerful trade unions will demand higher wages
without corresponding in increase in productivity, hence suppliers will be forced to
increase the selling price to meet their profit margins.
ii. Profit push inflation/ increase in profit margin: if the producers of certain
commodities have monopoly power in the market. They fix up higher profit margins
without any increase in other elements of costs. An example of KPLC.
iii. Material push inflation: if there is increase in costs of raw materials like gas, oil or
chemicals, which are used directly or indirectly used in almost all countries, it causes
an increase in the cost of production, hence general increase in price levels.
iv. Exchange rates: if the country’s currency is devalued, it results to domestic inflation.
v. Higher taxes: if government levies new taxes and raises the rates of old taxes, the
producers generally shift the burden of taxes to the consumers hence increasing the
prices of commodities. for example, the proposition of VAT increasing from 16% to
18%.
vi. Import prices: if a country carrying out foreign trade with another is likely to import
the inflation of that country in the form of intermediate goods.
POSSIBLE SOLUTIONS OF INFLATION IN KENYA
There are various ways through which the Kenya Government can control inflation. They are
the measures to control inflation. They can be classified under:
1. Monetary policies
2. Fiscal policies
3. Non-monetary policies
1. Monetary measures
Monetary policy influences the economy through the changes in money supply and available
credit. Monetary policy is adopted by the Central Bank of Kenya. Various monetary measures
include:
i. Bank rate policy
During inflation, bank rate is raised and in view of this, commercial banks also raise their rates of
interest. Due to rise in rate of interest, borrowing is discouraged and supply of money in
circulation decreases.
ii. Open Market Operation
During inflation, central banks sell the securities like treasury bills and bonds, and the supply of
money in circulation decreases.
iii. Reserve Requirement
During inflation, reserve requirement is increased by the central bank and due to that money at
the disposal of commercial banks decreases. It helps to control the supply of money in
circulation.
iv. Consumer’s selective credit control
According to this method, central bank discourages the purchase of commodities on instalment
basis to check the inflation.
v. Rationing of credit
All commercial banks can get loans from central bank up to a specific limit. During inflation, this
limit is decreased.
vi. Margin requirement.
The difference between the value of security and loan advanced against that security is known
as margin requirement. During inflation, margin requirement is raised.
2. Fiscal policies/measures
This is the deliberate change in either government spending or taxes to stimulate or slow down
the economy. The main fiscal measures include:
i. Government expenditure
During inflation, the government reduces its expenditure, and as a result money supply in
circulation reduces and prices fall.
ii. Changes in taxation
If the government of a country brings changes in tax rates, it can help in stabilization of
prices in the country for example, a decrease in tax rates increases disposable income in
relation to national income. Hence, consumption rises at every level of national income.
3. Non- monetary measures
Other than fiscal and monetary measures, the other measures which are helpful in controlling
inflation are:
i. Wage adjustment
Wages must be raised at regular intervals to enable the individuals to maintain their
purchasing power at the same level.
ii. Output adjustment
Some steps must be taken by the government to increase the production of goods, so that
rise in prices of goods is checked up.
iii. Price control
Prices of some necessities are fixed by the government and this cannot be raised without
the permission of the government. In other words, it imposes direct control on prices of
essential items.
iv. Rationing
Through this, purchase of specific commodities is controlled, like only a specific quantity of
goods can be purchased as at specific period.
v. Control of money wages
This will help to keep down costs of production.
CONCLUSION
It is important to note that, some level of inflation is considered normal and even desirable in most
economies. The Central Bank often target a specific inflation rate like 2% to promote price stability and
economic growth. However, when inflation is too high or too low, it can have detrimental effects on an
economy, and policy makers must take action to manage it effectively.
SOURCES/REFERENCES
References
Dewett, D. K., & Navalur, M. (2010). Modern Economy Theory. Panjab, India: S. Chand Publishing.
Robert Mudida B.A (ECON) ( Hons), M. (2003). Modern Economics. Nairobi: Focus Publication Ltd.
Saleemi, N. A. (2007). Economics Simplified (Revised and Updated). Nairobi: Saleemi Publications Ltd.