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One of the determinants of the perfomance of an economy is the inflation rate. In most countries it is arrived at by looking at the changes in the prices of basic items purchased by the public like foodstuff, oil, and other basic commodities. The net increase in price is then presented in the form of a percentage rise in comparison to the previous period under evulation. The periods under evaluation can be month to month, week to week or year to year.

Since it is based on real price changes, I believe that inflation is a real thing. You can ask the general members of the public and they will tell you that last month, they were buying bread at Ksh 5 and this month they are buying the same bread at Ksh 7. This means that the month to month inflation rate is 40% and the public can feel that change in their pockects. Why? because the salaries that they earn in most cases has not risen which means that with the same earnings, they can buy less food items and pay less bills.

Of all the other major economic performance determinants, inflation is the most real since it has the most impact on the people. Looking at a country like Zimbabwe were the yearly inflation rate currently stands at 100,000 %, the Zimbabweans can feel the difference because they now need to carry huge amounts of money to buy the same products. Since most of their income is now being used on food stuff, they are unable to spend money on investment and other productive activities which inturn affects the avialability of products. It is not hard to understand why then, the zimbabweans are crossing over the border to buy food from South Africa since it is not avialable in Zimbabwe.

Once can argue that all inflation does is that it demoninates the value of a currency in comparison to other world currencies. This means that the only impact that inflation has is to increase the written value on the notes printed but does not cause any real change on the actual price of the product. An example would be that if bread was costing Ksh 5 then now it will cost Ksh 50 using a note printed on it Ksh 50 instead of Ksh5. What people forget is that the bread is made using machines imported from other countries. If the currency of that local country becomes weaker in comparison to the currency from which the good is imported from, then the actual price becomes higher leading to the eventual increase in price of the bread to the final consumer since this increase is transferred to him. This means that the actual cost of the bread will now be Ksh 15 instead of Ksh 5 even though the cusomer buys the bread using a Ksh 50 note.

Therefore countries need to control inflation by controlling its major causes which include; political unrest, a huge increase in the value of imports, hoarding of goods by producers, printing of additional notes, a lot of cash in circulation in the economy amongst othe reasons. The country can also increase its exports, apply monetary control measures through the central bank so as to control inflation. if inflation is kept at a managable level, the government will not need to borrow money from the public at high costs and thus control the interest rates that the public are charged on loans. When money is cheaper to borrow, then development is encouraged in the economy leading to real growth which the general public can enjoy.

Learn more about this author, Magu Nguru.
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