Inflation in kenya: an empirical analysis of inflation trends and policy.

Abstract

This paper will trace the main causes of inflation in Kenya during the period 1971 - 2001 and its effects on selected macroeconomic indicators, based on pertinent theoretical and empirical literature review. The paper argues that inflationary pressure in Kenya in the decade of 1970s was mainly supply side inflation due to changes in external prices through the mechanism of rigid parities. While in the decade of the 1980s there was excessive deficit financing resulting inseignorage. During the '80's decade there was repressed inflation that was characterised by food shortages due to rationing, hoarding of essential commodities and the existence of black-markets. In the 1990s inflationary process was mainly due to liberalization and seignorage in the wake of pluralism on the political scene that resulted in excess liquidity within the economy. In this period (1991-1994) inflationary pressures were released much more intensively through open inflation. The increase in price levels in 1991- 1994 represented the size of monetary expansion in a situation of expanded Government spending. The paper further examines the effects of low inflation policy (achieved through setting of targets) pursued in the period 1996-2002 and its impact on~omic performance