How rising prices affect your household budget

You do not have to follow economic reports or watch the news every day to see that your money buys less. Perhaps your local food shop has become more expensive. Or you may be finding that transport costs take up a greater share of your budget. Or you may have seen that your bill has increased despite no change to your behaviour. Exploring the differences between household budgets, changes in individual prices and inflation can help you make sense of these observations.

What inflation really means

Inflation refers to an increase in the average price level over time. If the rate of increase in prices is higher than the rate of increase in your income, then the purchasing power of your income decreases. The Central Bank of Kenya explains this relationship in its overview of monetary policy, which sets out the importance of price stability.

A decrease in inflation does not usually mean that prices have returned to where they were before. Instead, it refers to a slowdown in the rate of price increase. Some prices may have decreased while others continue to rise. This is important to consider when a headline appears to be positive but your budget still feels expensive.

Inflation for individual households varies

Households spend their money in different ways. A household that uses a lot of public transport may be affected by fuel price changes in a different way than a household that commutes on foot. Food, healthcare, education, rent and transport may differ significantly as a portion of two different household budgets.

National measures of inflation represent a general trend and may not represent changes to individual household budgets. To measure the changes in your own household budget, track the costs of a consistent basket of your most important items over several months. Try to maintain similar quality and quantities; otherwise, a change in what you buy can look like a change in prices.

How the economy impacts your budget

Businesses face costs including wages, materials, energy and transport. These costs can affect the prices that consumers pay, but the magnitude and time lag may vary. Some products may also be affected by supply chain problems and weather conditions. Imported goods may also be influenced by exchange rates and foreign prices.

There is not a single factor that explains all increases in prices. Kenya's economy has its own conditions, and other African countries have different currencies, trade agreements and economic policies. Continent-wide headlines can help you start to pose questions but do not provide a precise picture of your household budget.

Lending and saving may also be affected

The state of the economy and monetary policy can affect the cost of borrowing, but the actual price of a loan will depend on the agreement, the product and the lending institution. Check the actual terms of your loan rather than assuming that a central bank announcement will automatically change your instalment.

With regard to savings, consider both access to your money and its purchasing power. You should always have access to emergency funds when you need them. Pursuing higher returns should not come at the cost of fees, restrictions on access to the money or the risk of losing your money. This article does not promote or suggest specific savings or investment products.

Use your own data to adjust your budget

Before cutting into discretionary items at random, make sure to look at the costs of food, housing, transport and any other important items in your budget. Also consider distinguishing between a temporary increase in a cost and a permanent increase in a cost. Our budgeting guide can help you convert this into an achievable plan.

When possible, consider alternatives. Include transaction and travel costs. Avoid bulk purchases if they lead to waste or cash shortages. If debt payments are interfering with your essentials, refer to the Debt Management guides and contact your lender before a missed payment results in a larger problem.

Track the trend without tracking every headline

Reacting to economic headlines on a daily basis may not be the best option. Instead, a monthly review is often more useful. Track your most important costs and refer to reputable information sources within Kenya. The goal is to make sense of what has changed and react thoughtfully. A constrained budget may not always be solved by improved planning alone.

Further reading: Central Bank of Kenya Learning Centre. No current inflation rate or forecast is assumed in this guide.