In Summary
  • This means that over the past 56 years, the general prices of goods and services in Kenya have increased by a factor of 199.34 – almost 200 times. In other words, an item that cost one shilling in 1961 will most likely cost about Sh200 today.
  • From this data, it turns out that the average annual inflation rate over the last 56 years was about 9.92 per cent.

Last week we attempted to answer this question: if you have Sh240 million in a bank account and you spent Sh10,000 daily, how long would the money last? The answer was shocking: at that withdrawal rate, money would never get finished – never ever. It would last until the end of the world!

The reason is that, each day, the Sh240 million earns more than Sh10,000 in interest. Therefore, as we found out, your balance would gradually increase even though you are removing a large sum daily.

But then a second question popped up: what if you wanted to maintain the same lifestyle that costs Sh10,000 today? That is, buy the same quality and quantity of goods for as long as possible: how long would the Sh240 million last?

To get the answer, we need to account for inflation. Records from the Kenya National Bureau of Statistics indicate that the consumer price index in Kenya increased from 0.93 in 1961, when data collection started, to 185.39 in June this year.

This means that over the past 56 years, the general prices of goods and services in Kenya have increased by a factor of 199.34 – almost 200 times. In other words, an item that cost one shilling in 1961 will most likely cost about Sh200 today. From this data, it turns out that the average annual inflation rate over the last 56 years was about 9.92 per cent. It is reasonable to use this long-term average rate to project to the future. Indeed, in order to simplify the calculation, we may round it off to 10 per cent.

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