By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

05 April 2015

A reader going by the name of Salimiana says that his father won KSh1,200 in 1955 and wants to know how much that is in today’s money. Upon checking with the Central Bank of Kenya, I found that there was no Kenyan shilling in 1955! At that time, the country was using the East African shilling.

The Kenyan currency was introduced in 1966 and it initially exchanged with the East African one at par; that is, KSh1 for EASh1. In the mid-1960s, the international exchange rate was about EASh7 to the US dollar. So, EASh1,200 was equivalent to US$171.

To day, the US dollar exchanges for about KSh92, so US$171 is equal to about KSh15,000. That doesn’t sound right; it is appears too little. The reason is that we have assumed that the US$ is immune to inflation. Yet today’s US$ buys very much less than a 1966 one.

So, we should factor in the inflation rate of the dollar over time. But that would be unnecessary because what we want is the buying power of the local currency; not its exchange rate.

For that, we look for Kenyan inflation data. According to the Kenya National Bureau of Statistics the Consumer Price Index (CPI) was 0.91 in 1961. This is the farthest backward that their data goes. The CPI is an index evaluated from average market prices of commodities and services.

The latest CPI is for the month of March 2015: it is standing at about 156. This means that an item that cost Sh0.91 in 1961 is now costing about Sh156. In other words, the average price of things has increased 171 times.

So, if the Sh1,200 was won in 1961, it would be worth about 1,200 x 171 = Sh205,200. This is much better than the Sh15,000 obtained when using the dollar exchange rate.

Still, 1955 was six years earlier than 1961. Since we have no data going that far back, we can work out the average inflation for the 54-year period (1961-2015) and use it to extrapolate backwards.

We get the average inflation by evaluating the 54th root of 171. That is, finding the number which, when multiplied by itself 54 times, gives 171. Only a scientific calculator can work that out and mine gives 1.10. This means that the average inflation since 1961 is 10 per cent.

To get the CPI for 1955, we divide that of 1961 (that is, 0.91) by 1.1 six times. That is 0.91 / (1.1x 1.1 x 1.1x 1.1 x 1.1 x 1.1). The answer is 0.514.

In other words, an item that cost 51 cents in 1955 costs Sh155 today. So the Sh1,200 that the old man won is equivalent to winning about Sh362,000 today.

What if the old man had invested this money: how much would it be worth today? That’s a story for another day.