Selected Macroeconomic Drivers of Inflation in Kenya

High and volatile inflation is a threat to good economic performance and has negative effects on many of the poor. Economic growth took off in 2004 in Kenya, but alongside higher growth, there has been rapid inflation and large inflation volatility. The study sought to establish the effect of unemployment, narrow money supply, wide money supply and level of GDP on inflation in Kenya. The study relied on secondary annual time series data. The sources of the secondary data were the Kenya Bureau of Statistics, Central Bank, IMF and World Bank. The study employed the use of a Vector Autoregression (VECM) model due to its robustness in forecasting. The corrected data was first subjected to unit root test at levels using Augmented Dickey Fuller, and Philips Perron methods. The data was found to be non-stationary at level but stationary at first difference. The data was then tested for cointegration using Johansen procedure. Modeled variables were found to have long term relation. The Vector Error Correction Model (VECM) was used to determine short term relations among the variables. It was established that GDP growth rate, narrow money supply, unemployment and exchange rates could significantly determine inflation. Modeled variables passed stability test as well as diagnostic tests thus were fit for analysis. Study highly recommends that the government should complete the planned projects under the vision 2030 to grow the GDP by the projected 10% annually and thus reduce inflation.