Beyond the Price Tag: Why What Kenyans Spend Isn’t Always What They Consume
Category: Economic literacy
By: Maureen Barasa,
Markets in Kenya from Kariokor and Gikomba in Nairobi to Kongowea in Mombasa buzz with the flow of physical cash, bank transfers, and mobile money. Consumption itself, at first glance, is movement of money from wallets, Mobile Banking, M-Pesa, T-Kash or Airtel Money accounts. Food is bought, school fees paid, clothes are bought. But economics teaches that consumption and expenditure are two different things. Treating them equally biases the true measurement of welfare, poverty, and resilience in Kenya.
Take the example of Mama Nyakundi, who is a farmer in Nyakemincha. She pays for a Ksh 80,000 motorbike from her savings club to enable her son to start a transport business. The family’s expenditure increased dramatically during that year. What does is the family actually consuming? Not the motorbike itself, but the transport services it renders at an estimated Ksh 16,000 per year, after depreciation and returns are factored in the final costs. The other Ksh 64,000 is not an expenditure on consumption; it is an investment that is part of the household’s wealth.
Milton Friedman, in his Permanent Income Hypothesis, drew this very distinction. He argued that cars, refrigerators, or in Kenya’s case, motorbikes, solar panels, and water pumps are not being consumed when they are bought. They are all investments, and what households actually consume is the flow of services these assets pay over time. The math is straightforward; expenditure equals current consumption plus investment in durables.
To see this more clearly, this is illustrated in Chart 1 below. The upward-sloping line (CLR) represents the permanent consumption function. It shows that in the long run, consumption rises steadily with permanent income meaning that the higher your steady income, the higher your steady standard of living. If you compare that to the short-run curves, they are flatter, because when income shifts in a single year, people don’t immediately change their consumption by the same amount. They might wait to observe if the increase will long term. If it does, their consumption steadily increases to meet their new, higher permanent income. In other words, long-run consumption is smooth and proportional to income, while short-run consumption is cautious and less responsive to temporary income changes. That’s exactly the argument of Friedman’s Permanent Income Hypothesis.
Chart 1: Illustration of Permanent Income Hypothesis
Source: Permanent Income Hypothesis
This is important because families don’t plan day-to-day consumption on this year’s or this week’s income. And as Friedman said, individuals plan their living standards based on their long-run, permanent income. Those short-run windfalls such as overtime wages, bonus, a bumper harvest, or that M-Pesa side hustle that does exceptionally well are transient. Households are more likely to save or invest such income than to change their day-to-day consumption.
The issue is that most of the studies, including some on Kenyan data, uses aggregate expenditure as a proxy for consumption. This results in inaccurate estimates. A household buys a boda boda in one year and hardly anything else the next year, so its spending would show volatility. But real flows of food, rent, bus fares, and the flow of services from in-place durables can be stable. Volatility occurs in investment, not in welfare.
This has deep implications on the concept of poverty. If research labels the boda boda purchase as wasteful consumption, they are overlooking that it is a resilience act, an asset generating income and services over several years. A year of reduced expenditure may not represent distress if the household is living off past purchasing of durable consumption items. Social protection schemes such as Inua Jamii are thus bound to be mis specified if they interpret low expenditure to mean low welfare. The challenge is not in expenditure, but the underlying level of living that is facilitated by current flows and accumulated stock.
Kenya already possesses the instruments to measure this accurately. The Kenya Integrated Household Budget Survey has data that permit the distinction between goods and services that get consumed rapidly, and those like food, utilities, transport and durable goods whose worth accumulates over the asset’s life. Service flows have to be estimated from these assets. A five-year lasting motorbike which costs Ksh 60,000 will have a contribution of roughly Ksh 12,000 to consumption annually. Similarly, owner-occupied houses ought to pay their imputed rent; the price to pay rent on an equivalent house in the same area. And summing direct spending, service flows from durables, and imputed rent to one can hold a lot more accurate household welfare.
If we validate the Permanent Income Hypothesis with such nuanced measures instead of raw expenditure, then maybe a majority of Kenyan households might actually be less sensitive to shocks than assumed. During the period of the COVID-19 pandemic, drought or flood periods, households might have reduced durable expenditure but maintained food and essential services, as Permanent Income Hypothesis suggests . This emphasizes the value of keeping mechanisms such as chamas, digital credit facilities like M-Shwari and Fuliza, and insurance; they enable the resilience of households to such temporary shocks without undermining their permanent standard of living.
Measuring welfare by expenditure only is similar to judging a book by price. A solar panel or motorbike is not wasteful spending, but a series of future consumption smoothed over several decades. If policy fails to account for this, it runs the risk of misconstruing poverty and underestimating resilience. It is possible that the means measurement for the determination of premiums for Kenya’s Social Health Insurance scheme (SHIF) may be miscalculated, owing to inadequate recognition of permanent income hypothesis. Kenya’s economic tale is one not of what households consume today, but what they can consume efficiently in the long term. Looking beyond the bottom line provides a more accurate picture of welfare, resilience, and policy requirements and that is sound economics for Kenya. Those who design policy in Kenya would do well to take this basic lesson in mind or risk designing policies with econometric measurements that provide no insight about the welfare position that obtains in Kenyan households.
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Beyond the Price Tag: Why What Kenyans Spend Isn’t Always What They Consume
| Post date: Tue, Sep 23, 2025 |
| Category: Economic literacy |
| By: Maureen Barasa, |
Markets in Kenya from Kariokor and Gikomba in Nairobi to Kongowea in Mombasa buzz with the flow of physical cash, bank transfers, and mobile money. Consumption itself, at first glance, is movement of money from wallets, Mobile Banking, M-Pesa, T-Kash or Airtel Money accounts. Food is bought, school fees paid, clothes are bought. But economics teaches that consumption and expenditure are two different things. Treating them equally biases the true measurement of welfare, poverty, and resilience in Kenya.
Take the example of Mama Nyakundi, who is a farmer in Nyakemincha. She pays for a Ksh 80,000 motorbike from her savings club to enable her son to start a transport business. The family’s expenditure increased dramatically during that year. What does is the family actually consuming? Not the motorbike itself, but the transport services it renders at an estimated Ksh 16,000 per year, after depreciation and returns are factored in the final costs. The other Ksh 64,000 is not an expenditure on consumption; it is an investment that is part of the household’s wealth.
Milton Friedman, in his Permanent Income Hypothesis, drew this very distinction. He argued that cars, refrigerators, or in Kenya’s case, motorbikes, solar panels, and water pumps are not being consumed when they are bought. They are all investments, and what households actually consume is the flow of services these assets pay over time. The math is straightforward; expenditure equals current consumption plus investment in durables.
To see this more clearly, this is illustrated in Chart 1 below. The upward-sloping line (CLR) represents the permanent consumption function. It shows that in the long run, consumption rises steadily with permanent income meaning that the higher your steady income, the higher your steady standard of living. If you compare that to the short-run curves, they are flatter, because when income shifts in a single year, people don’t immediately change their consumption by the same amount. They might wait to observe if the increase will long term. If it does, their consumption steadily increases to meet their new, higher permanent income. In other words, long-run consumption is smooth and proportional to income, while short-run consumption is cautious and less responsive to temporary income changes. That’s exactly the argument of Friedman’s Permanent Income Hypothesis.
Chart 1: Illustration of Permanent Income Hypothesis
Source: Permanent Income Hypothesis
This is important because families don’t plan day-to-day consumption on this year’s or this week’s income. And as Friedman said, individuals plan their living standards based on their long-run, permanent income. Those short-run windfalls such as overtime wages, bonus, a bumper harvest, or that M-Pesa side hustle that does exceptionally well are transient. Households are more likely to save or invest such income than to change their day-to-day consumption.
The issue is that most of the studies, including some on Kenyan data, uses aggregate expenditure as a proxy for consumption. This results in inaccurate estimates. A household buys a boda boda in one year and hardly anything else the next year, so its spending would show volatility. But real flows of food, rent, bus fares, and the flow of services from in-place durables can be stable. Volatility occurs in investment, not in welfare.
This has deep implications on the concept of poverty. If research labels the boda boda purchase as wasteful consumption, they are overlooking that it is a resilience act, an asset generating income and services over several years. A year of reduced expenditure may not represent distress if the household is living off past purchasing of durable consumption items. Social protection schemes such as Inua Jamii are thus bound to be mis specified if they interpret low expenditure to mean low welfare. The challenge is not in expenditure, but the underlying level of living that is facilitated by current flows and accumulated stock.
Kenya already possesses the instruments to measure this accurately. The Kenya Integrated Household Budget Survey has data that permit the distinction between goods and services that get consumed rapidly, and those like food, utilities, transport and durable goods whose worth accumulates over the asset’s life. Service flows have to be estimated from these assets. A five-year lasting motorbike which costs Ksh 60,000 will have a contribution of roughly Ksh 12,000 to consumption annually. Similarly, owner-occupied houses ought to pay their imputed rent; the price to pay rent on an equivalent house in the same area. And summing direct spending, service flows from durables, and imputed rent to one can hold a lot more accurate household welfare.
If we validate the Permanent Income Hypothesis with such nuanced measures instead of raw expenditure, then maybe a majority of Kenyan households might actually be less sensitive to shocks than assumed. During the period of the COVID-19 pandemic, drought or flood periods, households might have reduced durable expenditure but maintained food and essential services, as Permanent Income Hypothesis suggests . This emphasizes the value of keeping mechanisms such as chamas, digital credit facilities like M-Shwari and Fuliza, and insurance; they enable the resilience of households to such temporary shocks without undermining their permanent standard of living.
Measuring welfare by expenditure only is similar to judging a book by price. A solar panel or motorbike is not wasteful spending, but a series of future consumption smoothed over several decades. If policy fails to account for this, it runs the risk of misconstruing poverty and underestimating resilience. It is possible that the means measurement for the determination of premiums for Kenya’s Social Health Insurance scheme (SHIF) may be miscalculated, owing to inadequate recognition of permanent income hypothesis. Kenya’s economic tale is one not of what households consume today, but what they can consume efficiently in the long term. Looking beyond the bottom line provides a more accurate picture of welfare, resilience, and policy requirements and that is sound economics for Kenya. Those who design policy in Kenya would do well to take this basic lesson in mind or risk designing policies with econometric measurements that provide no insight about the welfare position that obtains in Kenyan households.
More Blogs
Kenya’s National Budget: A Matatu Ride Reflecting Fiscal Volatility and Structural Inefficiencies
Introduction The matatu metaphor can be used to analytically frame Kenya’s budget as a system that is subject to binding constraints, evolving expectations, and continuous adjustment to shocks. Like the matatu sector, fiscal policy reflects a balancing act between efficiency and quick action seeking to respond to public service delivery while constrained by competing sector […]
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Introduction Imagine paying the same fare to travel at 6 a.m. as you would at 6 p.m., even though the matatu is half-empty in the morning and packed in the evening. At 6 a.m., there may be more seats available than passengers willing to pay for them. By 6 p.m., the situation is reversed. Hundreds […]
What Would It Mean for a Hypothetical Listing of Space X On Nairobi Stock Exchange?
Absurd hypotheticals are useful precisely because they stress-test a system until its constraints become visible. This note asks what would break first if SpaceX, now a public company following its record-breaking Nasdaq debut in June 2026, with a post-IPO market value of approximately US$ 2.5 trillion, sought a secondary cross-listing on the Nairobi Securities Exchange. […]
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Kenya’s proposed post-2030 Vision commits the country to high-income status “within a generation.” One positive issue that should be emulated is that the document seeks to solve the most important policy decision and the foundational problem in economics, which is to expand output and labour. Skeptics ask the most important question, why would this plan […]
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According to the Annual Debt Report 2024/25, as shown in Chart 1 below, Kenya today is such that for every one hundred shillings the Kenyan government raises in tax revenue, approximately ksh71 goes directly into servicing existing debt before a single hospital is staffed, a classroom is built, or a kilometre of road is constructed. […]