Islamic Finance Blog & Articles
Inflation is an essential facet of finance that, unfortunately, not a lot of people truly understand. It is a common misconception for people to believe that inflation only affects big corporations, banks, or the overall economy. This misconception is part of what makes inflation so dangerous as it is often overlooked.
People often do not notice the effects of inflation until they get particularly bad. What they do not realize is that inflation is occurring and affecting them every day. The results of inflation can be seen in your purchasing power and your ability to buy things. The goods and services you avail of are constantly getting more and more expensive. You are paying more for the same goods and services that you were buying 20 years ago. It means that if you are not regularly getting a raise, you will not be able to keep up with inflation. Understand more about this topic and learn what you can do to help you in beating inflation.
What does inflation mean?
Inflation can be described as how fast prices in the economy rise. If you have noticed that the cost of your favourite snack has increased over the years, this is due to inflation. Economists measure inflation by observing the prices of items on the market. Banks want inflation in small amounts, however, because it stimulates the economy and encourages spending.
On the other hand, high inflation is detrimental to the economy and can put people in serious debt if not handled properly. Countries have seen hyperinflation before, and some countries are still recovering from the effects. High inflation rates can drive up the costs of everything. It means that it would be more expensive to live and more costly for businesses to operate. It is also hard to plan for future finances if the inflation rate is not stable and predictable. Because of this, central banks make it a top priority to keep inflation rates at optimal and manageable levels.
What makes inflation rise?
Inflation rates rise because of various economic reasons. They can be due to significant corporations performing business or because of circumstances that are completely uncontrollable and unprecedented. The governments of different countries also play a prominent role in the control of inflation.
Supply shortages are a significant and frequent case of price inflation. As demand for products increases for various circumstances, the supplies of these products must respond accordingly, or else inflation will occur. If supply chains cannot keep up with the demand of products, then the products that are in supply will increase in price because everyone is trying to get their hands on it.
Another primary reason is due to corporations and businesses increasing their prices. Suppose a particular sector or industry of the economy is hit hard by unforeseen circumstances. In that case, companies will often see it fit to increase their prices to recover. Raising prices hurts consumers, but it increases inflation by a significant amount each time.
The last primary reason for rising inflation rates is government policies. The central banks are branches of the government, and they hold much sway over the economy. Many aspects of what they do control the economy and manage it to not get out of hand. Because of this, they can also stimulate and increase inflation if it is needed.
Inflation is forever
Most economists are adamant that inflation will be a persistent challenge in the world. It is not going anywhere, and inflation is most likely here to stay. It is a simple byproduct of the way business is conducted in society. As long as the factors are present for inflation to exist, such as supply and demand, inflation will carry on. The only thing you can do to combat it is to prepare yourself for inflation and react to the changes in the market as necessary.
It is important to remember that inflation is a trend that can be affected by many factors often out of your control. Because of this, it is pertinent that you take the matter very seriously, or else your money may lose its value.
How you can beat inflation
Just because inflation is here to stay does not mean that you are simply at its mercy. There are ways for you to combat inflation and protect your wealth from its advances. If inflation means the increase in prices of the products and services available on the market, then to fight this, you need to have your money grow as well. It is the main idea for protecting yourself against inflation.
The first and most obvious way to beat inflation is to increase your salary. When inflation rises, your purchasing power weakens in conjunction with it. Therefore, it only makes sense that your salary should increase to accommodate this change in the economy. The problem is, not all employers do this for their employees' salary. If your current job does not offer you the raise you need, you should consider looking around for a workplace that will accommodate your increased salary. It is important to remember that inflation is a problem that will persist for many years to come. As a result, you should ask for a raise that will allow your salary to keep up with inflation for years to come.
Another good way to fight inflation is to invest in appreciating assets. These are assets that will, more often than not, go up in value. Examples of appreciating assets are real estate properties, bonds, ETF, mutual funds and stocks. Because the importance of these assets goes up, they are protected from inflation, and they keep the purchasing power of your wealth. Inflation is long-term, so you should be thinking long-term as well.
Getting Professional Help
Fighting inflation is possible, but it may be difficult for most people, especially those that are uninformed. Luckily for you, there are financial advisors that will help you create a financial plan that will help you fight inflation. Islamic financial planners exist to help Muslims manage their finances and practice investing in a halal manner. Do not be afraid to contact an Islamic financial advisor as soon as possible.