Inflation and unemployment are critical economic indicators that influence decision-making across all professional sectors in Kenya. Understanding the types and causes of inflation enables professionals to anticipate cost changes and wage pressures that affect operational budgets, pricing strategies, and employment conditions. Similarly, knowledge about unemployment dynamics helps managers and policymakers in county governments, banks, and educational institutions to design effective workforce planning and social interventions. This chapter explores the different types of inflation and their underlying causes, providing a foundation for applying economic skills in diverse organizational contexts.
Inflation and unemployment are two of the main measures of how well an economy is performing, and they affect every household, business and government office. Before studying their types, causes, effects and control, a learner must be clear about the basic terms used throughout this chapter. Precise definitions allow people to read economic news, interpret government statistics and discuss policy with confidence. Example: a county hospital finance officer who understands the consumer price index and the inflation rate can explain why the drug budget must rise each year just to buy the same quantity of medicines.
The price level is the average of the prices of all goods and services in an economy at a given time. It is not the price of a single item but a general measure, so a change in it shows whether life is becoming more or less costly overall. Example: if the prices of maize flour, bus fares, rent and school uniforms all rise during a year, the general price level has risen, even though some individual prices may have stayed the same.
Inflation is a sustained rise in the general price level over a period of time, which reduces the purchasing power of money. A one-time price increase on a single product is not inflation, because the rise must be general and continue over time. Example: a teachers' SACCO notices that Ksh 100,000 given as a loan this year buys fewer goods than the same amount did last year, because prices in general have kept rising.
The inflation rate is the percentage change in the price level between two periods, usually one year. It is the figure reported by the Kenya National Bureau of Statistics each month and used by the central bank to guide policy.
Formula: inflation rate = (new price index − old price index) ÷ old price index × 100
Substitution: inflation rate = (112 − 105) ÷ 105 × 100
Working: 7 ÷ 105 × 100 = 6.67
Result: inflation rate = 6.67 percent
The consumer price index measures the change in the cost of a fixed basket of goods and services bought by a typical household. A base year is given the value 100, and later values show how the cost of the same basket has moved. Example: if the basket costs Ksh 20,000 in the base year and Ksh 22,400 in the current year, the index for the current year is 112.
Formula: CPI = cost of basket in current year ÷ cost of basket in base year × 100
Substitution: CPI = 22,400 ÷ 20,000 × 100
Working: 1.12 × 100 = 112
Result: CPI = 112
Purchasing power is the quantity of goods and services that a unit of money can buy. It moves in the opposite direction to the price level: when prices rise, each shilling buys less, and when prices fall, each shilling buys more. Example: a farmers' cooperative that could buy 50 bags of fertiliser with Ksh 150,000 last season may be able to buy only 45 bags this season if the price per bag has risen.
A nominal value is measured in the money of the day, without any adjustment for changes in prices, while a real value is adjusted for inflation so that it shows what the money can actually buy. Real values give a truer picture of changes in income and output. Example: a hotel waiter whose wage rises by 5 percent when inflation is 8 percent has received a nominal increase but a fall in real income.
Formula: real value = nominal value ÷ price index × 100
Substitution: real wage = Ksh 21,000 ÷ 105 × 100
Working: 21,000 ÷ 105 = 200, then 200 × 100 = 20,000
Result: real wage = Ksh 20,000 in base-year prices
Deflation is a sustained fall in the general price level, which raises the purchasing power of money. Disinflation is different: prices are still rising, but at a slower rate than before. Example: if inflation falls from 9 percent to 5 percent, the economy is experiencing disinflation, whereas if the price index itself falls from 110 to 106, it is experiencing deflation.
Stagflation is a situation in which high inflation occurs together with high unemployment and slow or negative economic growth. It is unusual and difficult to deal with, because the usual policy for reducing one of these problems tends to worsen another. Example: when a sharp rise in fuel prices makes transport and production costs climb while factories reduce output and lay off workers, the economy shows signs of stagflation.
The labour force is the part of the population that is of working age and is either employed or actively seeking work. People who are not seeking work, such as full-time students, retired persons and those who care for the home, are outside the labour force. Example: in a ward with 10,000 adults of working age, 7,000 who are working or looking for jobs form the labour force, and the other 3,000 do not.
A person is employed when they work for pay or profit, and unemployed when they are able and willing to work at the current wage, are actively looking for work, but cannot find any. A person who has stopped looking for a job is not counted as unemployed in official figures, though such discouraged workers are still affected. Example: a graduate who applies for jobs at banks and schools every month but has no work is unemployed, while a student who is not seeking work is not.
The unemployment rate is the share of the labour force that is unemployed, expressed as a percentage. It is a key measure used by governments to judge the health of the labour market.
Formula: unemployment rate = number of unemployed ÷ labour force × 100
Substitution: unemployment rate = 700 ÷ 7,000 × 100
Working: 0.1 × 100 = 10
Result: unemployment rate = 10 percent
Full employment is a situation in which everyone who is able and willing to work at the current wage can find a job, apart from those who are temporarily between jobs or changing occupations. It does not mean that unemployment is zero, because some unemployment always exists as people move between jobs and new entrants search for work. Example: a county where workers who lose a job at a flower farm find another within a few weeks is close to full employment.
Underemployment is a situation in which people work fewer hours than they would like, or in jobs that do not use their skills fully. Disguised unemployment occurs when more workers are engaged than are needed, so that removing some of them would not reduce output. Example: five family members working on a small plot that two people could manage alone are disguised unemployed.
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Create a free accountThis chapter explored the different types of inflation, focusing on cost-push inflation which arises from increased production costs, and demand-pull inflation caused by excessive demand in the economy. It examined various causes of inflation, including supply shocks and monetary factors, and discussed the wide-ranging effects inflation has on purchasing power and economic stability. The chapter also outlined measures to control inflation, emphasizing fiscal policy that involves government spending and taxation, alongside monetary policy that regulates money supply and interest rates. Direct intervention strategies were presented as additional tools for managing inflation and unemployment. Causes of unemployment were analyzed, highlighting structural, cyclical, and frictional factors. Finally, the chapter detailed unemployment control measures aimed at reducing joblessness and promoting economic growth.