Inflation is one of the most commonly discussed yet often misunderstood economic concepts. At its core, inflation refers to the sustained increase in the general price level of goods and services in an economy over time. While moderate inflation is a sign of a growing economy, high or unpredictable inflation can erode purchasing power and distort financial planning for both individuals and businesses.
In May 2025, Kenya’s annual inflation rate declined to 3.8%, down from 4.1% in April, according to the Kenya National Bureau of Statistics and CBK. This rate remains comfortably within the Central Bank of Kenya’s target range of 2.5% to 7.5%.
Inflation is typically measured by the Consumer Price Index (CPI), which tracks the average change in prices paid by consumers for a basket of goods and services. When inflation rises, each unit of currency buys fewer goods and services than before, meaning money loses value. This affects not only how much we pay for groceries and transport but also how we save, invest and borrow.
For consumers, inflation reduces the value of money held in cash or savings accounts with low interest. As prices rise, the same amount of money covers fewer expenses. This highlights the importance of making inflation-adjusted investment decisions that preserve or grow real wealth including diversification of investments across various asset classes and investing in commodities and real estate. On the flip side, borrowers may benefit from inflation, as the real value of their debt diminishes over time, provided interest rates remain manageable.
For businesses, inflation raises the cost of production; raw materials, wages and transport become more expensive. These higher costs are often passed on to consumers in the form of price increases. This can reduce consumer spending and lead to lower sales volumes, ultimately affecting profits.
Governments and central banks monitor inflation closely and use tools such as interest rate adjustments to control it. Raising interest rates can help reduce inflation by making borrowing more expensive and slowing down spending due to reduced money supply in the economy. Conversely, lowering rates encourages economic activity, but if done excessively, it may stoke inflation.
Understanding inflation is critical for making informed financial decisions. Whether budgeting for household expenses, negotiating wages, or planning long-term investments, inflation should always be part of the conversation. By staying informed and adjusting strategies accordingly, individuals and businesses can better protect themselves from its adverse effects and take advantage of opportunities during inflationary periods
