What does 100,000 percent inflation mean?

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

09 March 2008

Silas Nyambok is worried about inflation. He says: “Recently, there have been a lot of complains about inflation in Kenya following the post-election violence and…the Central Bureau of Statistics announced that inflation in the month of January was somewhere around 19 percent.

“In Zimbabwe, it is reported that inflation has hit 100,000 percent! Can you shed more light on these figures so that many can feel what it costs to buy a loaf of bread that was previously costing Sh25 after an inflation of 100,000 percent.”

Now Silas, I wrote about Zimbabwe’s inflation in August last year. At the time, it was 4,500 percent. I normally discourage the use of percentages that are greater than 100 because they are confusing. For example, if I earn Sh30,000 and I get a 200 percent pay rise, what will be my new salary? (The answer is not Sh60,000)

Nonetheless, inflation figures are quoted in percentage per year. That is, if the Bureau of Statistics said Kenya’s figure was 19 percent, it means that if things remained the same, the prices of commodities would increase by an average of 19 percent in 12 months. Thus the loaf of bread would go from Sh25 to about Sh30 in one year.

But before you jump to say that bread has gone past Sh30 in less than one year, remember that this is an average figure – some things go up by big amounts and others by small amounts (or even drop).

100,000 percent inflation means that prices will go up by a factor of 1,000 in one year – strictly speaking, 1,001 times. Thus your loaf of bread would go to Sh25,000 in 12 months. It is no wonder that the Central Bank in Zimbabwe cannot release larger bank notes fast enough!

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Silas is also wondering about the terminologies used by business news readers on television. “Whenever it reaches time for business news at the bourse, I always find myself reaching for the remote just because someone will feature on the screen to tell me about Equity Turnover, 20-Share index and Market Capitalization. I need your help to understand these terminologies.”

Equity turnover is a complicated way is saying the total value of all the shares traded that day. Market capitalization is the total value of all the shares of the listed companies calculated at the prices prevailing that day. In other words, if you wanted to buy out all the companies, this is how much you would need to pay – currently about Sh850 billion

The 20-Share index is a value used for gauging the movement of prices at the stock market. It is evaluated from the prices of the 20 largest companies (Barclays, Bamburi, Kenya Airways, KenGen etc). When it goes up, it indicates that prices are generally going up and vice versa. And now they have introduced the All Share Index which monitors the prices of all listed companies.