Inflation & You

I decided to talk about inflation because there are a lot of numbers thrown about on a regular basis about it and people dont seem to be able to understand or interprete them.
Inflation simply refers to a rise in prices.

Why worry about inflation?

The first rule of investment is to protect your principal investment.Inflation silently eats away at this principal.To keep it at bay, your investments should earn more than the overall inflation

For example, in Kenya your investments must earn at least 13% per annum in dividends+interest+capital gains to maintain their monetary value.

If your investments aren't doing this on average(over one year or over 2-3 years) you are done(Wealth creation wise).

There are two main measures of inflation in an ecomomy:
1-Overall inflation-the rise in prices of all goods and services in the economy.

2-Underlying inflation(Core CPI in the USA)- rise in prices excluding food and energy/fuel costs.

Economists measure underlying inflation. the Monetary policies of most Central Banks target underlying inflation.For instance, in Kenya (Central bank of Kenya) CBK's aim is to keep underlying inflation within 5%

The Problem In real life your real cost of living(eating,sleeping and working)includes food and transport but when measuring inflation for their monetary targets economists leave out these items.
For instance,the Overall Annual Inflation is 13.94% and the Underlying Annual inflation is 3.88%.

How it affects you

Over the past couple of years Economists have been issuing statements saying that inflation is under control.However, the average Kenyan has been grappling with rises in food and transport costs.The economists are 'right' in their own way since, they are looking at underlying inflation which has been within the Monetary target for a while.

By the way,UK economists failed to predict the January 2007, rate rise by the Bank of England in a spectacular way.Read more here

Bankelele also talks about inflation in this post