The Efficacy of Modeling Inflation Process on the Consumer Behavior: a Case of Kenyan Economy

This book presents the conviction that inflation entails sizable economic and social costs, and controlling it is one of the prerequisites for achieving a sustainable economic growth. The study analyses the main sources of fluctuations in inflation in Kenya. It was found that the inflation in Kenya has been increasing within the recent years due to high fuel prices, among other factors resulting in high cost of living. Using the framework of error correction mechanism, it was found that the lagged consumer price index (CPI), expected inflation, petroleum prices and real exchange rate significantly propagate the dynamics of inflationary process in Kenya. Using the framework of error correction mechanism, it was found that the lagged consumer price index (CPI), expected inflation, petroleum prices and real exchange rate significantly propagate the dynamics of inflationary process in Kenya. The level of output was found to be insignificant in the parsimonious error correction model. However in the structural macroeconomic model, the individual lagged variables, the aggregated co-regressed variables resulted into a positive R2 at 0.01 significant levels.