"Inflation is taxation without legislation"
Milton Friedman

This statement is one of the most profound statements ever made by an economist. At its core it speaks of inflation for what it is, a tax on the residents of a country. Furthermore, it is a tax that in many cases is instituted by government action or inaction. Inflation as is defined in any introductory economics text is the continuous increase in price levels.

Recently the National Bureau of statistics in conjunction with the IMF declared that they will revise their inflation measurement tools. This is because they figured that inflation in Kenya as it is calculated, is currently overstated by a factor of two. This means that the current inflation rate of 18.7 percent actually should be approximately 9.5%. The move as they state, will lead to the country attracting investors who are currently put off by the highest inflation figures in the region. Investors will be buoyed by the fact that their workers will not have to negotiate higher annual increments due to the "overestimated" inflation on which they peg their wage negotiations.

So how exactly is inflation measured?. Inflation in Kenya is predominantly calculated through the Consumer Price Index (CPI). The CPI is like a big basket of goods and the aim is to measure the increase in the cost of the basket given fixed quantities of different goods. Added to this, the goods and services in that basket are given weights which could be thought of as measures of importance. The weights reflect how prominent that good or service is in the consumption habits of the population. In the case of Kenya, food is given a weighing of 50.5% of the overall basket (CPI), meaning that on average according to NBS estimates, Kenyans spend approximately 50.5% of their income on food. Alcohol and Tobacco has a weight of 1.7% and Clothing and Footwear has a weight of 8.8%

The main issue with the new move is that for me it seems to be cosmetic and misleading. The key issues for me is that the NBS want to reduce the weighting of food from 50.5% to 40.3% as well as add new items such as mobile phone airtime and internet costs. If this happens, in the next couple of quarters Kenyans should be seeing lower inflation figures. The key thing is that nobody should be fooled that inflation has reduced, all that has happened is a bit of mathematical magic. Reducing the weighting of food under the auspices that people do not spend as much on food as they used to is both misguided and unfair.

The average resident of Nairobi is even likely to spend all of his/her money on food given that primary education has become free. Most casual labourers earn around Ksh250 per day. With flour going for around Ksh80, a packet of milk and bread both selling for 35 each. The total food bill comes to Ksh 150 which is already 60% of his daily income. The new 40.3% weight is more likely to be felt for middle income earners in Nairobi but not for the bulk of casual workers who furnish Kenyan industry with their labour. Added to this, it is a bit misguided to add mobile phone airtime and internet costs to the basket. It is noted that consumers do purchase these items and they therefore warrant inclusion. However, in their state, they are likely to understate the inflation rate. Take airtime for instance, it is very unlikely that Safaricom faced with higher costs will sell Ksh100 airtime for 105 shillings Ksh100 airtime will remain that way forever. They are more likely to increase the charges on their tariffs. So with this in mind, isn't it wiser for the NBS to include a measure of mobile phone tariff charges rather than the cost of airtime?. Furthermore, internet costs in the long-run are more likely to go down than up. It is the very nature of technological products that due to innovation and obsolescence prices in the industry tend to drop.

All these factors summed will obviously reduce the inflation rate that we see on newspapers and hear about in the media, but they will not reduce the inflation that we feel or encounter in our daily lives. Think of it this way, imagine a typical marathon (42Kms). Due to some grumbling from the competitors about the length of the race, the marathon organisers decide to change their metrics. Instead of measuring a meter as 100 centimeters, they ordain that from now on a meter will be 200 centimeters. The effect will be to reduce the length of the marathon to 21kms. Participants will rush in to sign up due to the fact that the race is shorter, but will soon realise that they signed up for a daunting and long marathon. Investors and the general population will be mislead and will make wrong decisions in terms of their investment, saving and consumption patterns due to the new inflation rate.

This really reflects the general decay in the Kenyan policy environment and is reflected in the inefficiency of Central Bank Policy in its activities such as fighting inflation and stimulating demand through interest rates. One can check the following link for a deeper discussion about the inefficiency of the CBK and policy makers in general.

Summing up, simply watch out for the new figures and take them with a mouthful rather than a pinch of salt.