I am not going to tangle with @MaichBlack... Jamaa is deadly!

"You guys are reminding of a fellow who walked into a restaurant and bought a pizza. He was asked if it should be cut into four or eight slices. He said "Cut it into four, I'm not that hungry!"

The velocity not the quantity of money increases with M-Pesa. It may cause a (temporary) spike in inflation (in isolation) but that is coz of inefficiencies of the old transfer system. The 'temporary' inflation may be mitigated by the further efficiencies. So all in all... the overall cost/inflation should be LOWER.

Example:

A rural duka stocks wheat flour which the cucu buys after she receives money from her grandkids in Nairobi. This cash is received on the 5th (coz the grandkids gets paid on 30th) & would send it by bus/courier/relatives. The cost is quite high to send the cash. The duka can also squeeze the cucu by increasing prices. Cucu doesn't want to keep cash under her bed.

M-Pesa allows the grandkids to send cash weekly (1/4 the amount) at a relatively lower cost to Cucu. She need not buy the unga at one go. The dukawalla might find it prudent to sell it to cucu anytime during the month. He doesn't have the same control. Why would he keep stocks until th end of month if he can sell it & turnover the inventory?

Many rural dukas give goods on credit (until the chapaa is sent to Cucu) so being paid sooner (maybe even directly by grandkids) means he can survive with less Working Capital.

Bottomline: The inflation we saw was less about M-Pesa than weak KES = higher fuel prices = higher transport costs = higher prices of goods.

"You must have been a student of one of the lecturers @Gengis Khan is talking about!"

@Maichblack; let me try one more time, slowly this time.

You might recall your Economics teacher talking about the multiplier function of money. Namely the value of money is not limited to what it can buy in a single transaction but how much it circulates in an economy within a set time period. The faster the circulation, the higher the multiplier. M-pesa enables money to circulate much faster in an economy than traditional means of money movement. We agree?

The multiplier function works both ways, it generates economic value but can also generate inflation if there are few or no goods to buy.

Are we together so far?

M-pesa does not create new money, on that you are right. What it does create is money that changes hands many more times as it moves through an economy much faster than normal. If the economy is not flexible enough to produce goods/services at the same pace inflation occurs.

There is a simple solution to this, at least for Kenya's economy. Adopt a bi-monthly pay system as in some Western countries. This will force force flexibility into the economy - by changing production cycles from the end month oriented system we have now - essentially increasing the general movement of money in the economy so that M-pesa like effects will not have much impact.

If you can't understand this, I give up.

Equation of exchange:
MV = PQ

where

M is the nominal quantity of money.
V is the velocity of money in final expenditures;
P is the general price level;
Q is an index of the real value of final expenditures;

Velcoity does matter. So if MPESA increases velocity in the short term, it follows it is a factor in the short term.

Henry Hazlitt criticized the concept of the velocity of money, citing that the equation used to calculate it ignored the psychological effects that also have a significant role in determining the value of a currency. As an example, he shows that in a period of inflation, that when the money is newly introduced, the price level increases by a smaller proportion than the increase in the supply of money, but that when the money has been in circulation for a while, that the price level has increased by a greater proportion than the supply of money. He states that this is not due to a change in the velocity of money, but rather the discrepancy is due to "fears . . . that the inflation will continue into the future, and that the value of the monetary unit will fall further." Hazlitt offers an alternative to the quantity theory of money and the velocity of money concept that is a necessary consequence. He explains that what changes the value of money is the value that people place on the currency, and that it is not the velocity of money that determines the value of a currency, but rather the sum of individuals' value of the currency that determines the velocity of money.

Ludwig von Mises offers a more philosophical criticism, "The main deficiency of the velocity of circulation concept is that it does not start from the actions of individuals but looks at the problem from the angle of the whole economic system. This concept in itself is a vicious mode of approaching the problem of prices and purchasing power. It is assumed that, other things being equal, prices must change in proportion to the changes occurring in the total supply of money available. This is not true."