How inflation is eating into the middle class

The rising prices of goods and services and fall in the value of money are factors throwing more Kenyans out of the group of spenders, the middle class.

A new study by the Institute of Economic Affairs (IEA-Kenya) on Thursday said that these factors — inflation — are eating into this group of Kenyans previously thought to be influencing the spending trends in the country.

The study which analysed data from the Kenya National Bureau of Statistics (KNBS) of between 2009 and 2015 shows that the number of wage earners considered in the middle class are earning more than six years ago, but they are buying the same amount of goods and services with more money.

According to this study, the middle class comprise of those in businesses or employed and earn an average of Sh50, 356 or between Sh76, 396 and Sh102, 429.

In 2009, data showed that the middle class earned between Sh49, 656 and Sh67, 380 or an average of Sh31, 932. Today, this group’s earning is higher. However, when inflation is considered, they fall between Sh63, 000 and Sh47, 000, meaning that the average wage in this group remains unchanged at Sh31, 000.

“In simple terms, it means that if you earn Sh1 yesterday and bought milk and bread for 50 cents each and today you are buying just one item for Sh2, you are spending more even if you are earning Sh2 today,” explained Ms Ivory Ndekei, the Programmes Officer for Regulation and Competition at IEA-Kenya, during the launch of the study in Nairobi.

In 2009, Kenya’s average inflation was 11.75 per cent according to the IMF. Last year, it was at 5 per cent. But this rise often erodes the ability of consumers to buy goods.

The report shows there are 272, 569 middle class or 11 per cent of the wage earners. They earned Sh292 billion in nominal wages and paid Sh68 billion in income taxes in 2015. This means that each of them paid about Sh25, 000 in income taxes (PAYE), Sh15, 000 more than the average PAYE in the country.

But when their income was adjusted for inflation, it dropped to Sh182 billion. In fact when the rate of inflation was used on the group, their numbers dropped to 260, 180 (10.5 per cent).

“It means that the environment is not productive enough to enable the employment sector to pay higher wages,” argued Mr Stephen Obiro, the Head of Policy at the Federation of Kenya Employers (FKE), during the launch of the report at the Stanley Hotel.

“Businesses are only able to pay those higher wages if they are productive and competitive,” he said.

In Kenya today, there are about 2.5 million wage earners. But this study shows that the number of people considered above the middle class has shrank to a third (74, 337) of its size in 2009 when there were 235, 080 people in this category.

This may mean that the increase in the middle class could be due to a “relegation” of individuals from the top class, rather than a rise from the low class as has been perceived.

High inflation has been the main reason most workers go on strike to demand higher pay. In the past five years, teachers, civil servants, doctors, nurses and lecturers have all refused to work at some point to demand more money.

But economists worry that the real problem lies in the huge numbers of informal employment, which consists of 86 per cent (2,130, 994) of the entire workforce earning wages.

“There is a need to bring this group into the fold of regulation because if left as they are, the quality of their products cannot be standardised and we cannot tell exactly their contribution to the tax base,” added Ms Ndekei.

The study departed slightly from the traditional definition of middle class, which often relies on their spending trends and lifestyle, by focusing on income from formal employment as determined by tax records at the Kenya Revenue Authority (KRA).

“People can actually consume what they don’t buy. Income can give a fairly decent view of what people can consume and their buying power,” explained Mr Kwame Owino, Chief Executive Officer of the Institute of Economic Affairs.

The study focused solely on the Kenyan middle class, rather than compare with other countries. It followed recent reports that showed a ‘rising’ class capable of spending and saving.

In 2015, a study by the Standard Chartered Bank, the Emerging Affluence Report 2015, showed that Kenya’s middle class saves six times more than their American and British financial peers in the West.

In 2014, Kenya revised its economy and saw it grow by 25 per cent to officially enter the lower middle income category with a gross national income per person of Sh116, 000.

The World Bank threshold for middle income is Sh103, 600.

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