1. Silent Thief: Inflation, often unnoticed, can significantly erode the purchasing power of your savings over time.
2. Beyond the Numbers: A 2% annual inflation rate might seem low, but its cumulative effect over decades can be substantial.
3. Be Proactive: There are multiple strategies to shield your savings from inflation, from investing in stocks to diversifying globally.
4. Central Role: Central banks play a pivotal role in controlling inflation, and their decisions have direct implications for investors.
5. Empowerment through Knowledge: For young investors, understanding and strategizing against inflation is a cornerstone of financial success.
Table of Contents
Ever wondered why your money can’t buy as much as it used to before? In the past, one person's earnings could support an entire household of 5-6 people. But in today's world, even if everyone in the family brings in money, it doesn't suffice.
Why has it become this way? The answer is inflation!
Inflation can affect individuals, families, businesses, and entire economies in unfavorable ways.
For people who have just started their investment journey, understanding inflation and finding ways to tackle it is very important.
So let’s get started.
Inflation is a shifty price increase that happens over time. It means that the stuff you buy with your money starts to cost more.
For example, the dairy milk chocolate bar. In the 90s, its cost was just one dirham. But now, that same chocolate bar costs AED 5 or even more! That's inflation – your money buys less than it used to.
By definition, inflation is the rise in the overall price level of goods and services over time causing each unit of currency to become less worthy in terms of what it can buy.
Based on the rate of price increase, inflation can broadly be of 3 types:
Inflation happens due to various reasons. One common cause is when there's just too much money circulating in the economy and suddenly everyone has lots of extra cash. In such events, people start bidding up prices because they can afford to pay more, and the result? Inflation!
Like, when Dubai’s construction industry was booming, there was a huge surge in demand for real estate and this led to higher costs for building materials and labor, contributing to overall price increases and resulting in inflation.
Global events like an increase in global oil prices due to geopolitical tensions, supply disruptions, or increased demand, can lead to higher transportation costs and increased prices for goods and services worldwide.
Natural disasters, such as hurricanes or earthquakes, can also disrupt supply chains and cause shortages, which in turn can drive prices up.
Even, economic policies and decisions made by major countries, like changes in interest rates or trade tariffs, can impact the prices of imported and exported goods, affecting inflation both domestically and internationally.
Majorly, inflation can be grouped into 3 categories:
Imagine you have AED 100 in your savings account and it gives you an extra one dirham as interest after a year. So, you have 101 AED now. But in case of inflation, you would need 102 AED to buy the same stuff that you could get for AED 100 before, right?
So, you gained one dirham but the things you can buy with it are now more costly. It's like having a little more money, but it doesn't go as far because of inflation.
This can be a problem for anyone who prefers to save money rather than invest it because inflation reduces the purchasing power of the money.
A recent study by Ipsos also listed inflation as the number one global concern for the 11th month in a row.
With prices soaring higher than ever, it may seem that combating inflation is impossible.
We can’t control or escape inflation, but we can definitely navigate our way through this turmoil. Here are four actionable recommendations:
In Dubai and the United Arab Emirates, the Central Bank of the UAE plays a vital role in controlling inflation. They primarily use interest rate policy to influence the economy. By adjusting interest rates, they can make borrowing more or less expensive, which, in turn, impacts consumer and business spending.
For instance, when inflation is a concern, they may raise interest rates to encourage saving and reduce borrowing, thus slowing down the demand for goods and services.
Additionally, they use monetary policy tools to manage the money supply, and banking regulations to influence lending practices.
The Central Bank's policies aim to strike a balance between promoting economic growth and stability while ensuring that inflation remains at a manageable level, which is essential for maintaining the overall well-being of the economy and its residents.
Investing is a powerful tool for securing your financial future, and for young investors, it holds the promise of building wealth over time.
However, to successfully navigate the world of investments, it's essential to consider the impact of inflation.
All you need to do is keep these three things in mind:
The increase in prices and reduced purchasing power of money due to inflation can be both detrimental and beneficial.
Like, people with tangible assets (like property or stocked commodities) in their home currency are benefited from inflation as it raises the price of their assets and they can sell them at a higher rate.
On the other hand, people who hold assets like cash or bonds in their home currency may not like inflation, as it erodes the real value of their holdings. In such cases, inflation-hedged asset classes, such as gold, commodities, and real estate investment trusts (REITs) should be opted.
At RuDo, we aim to provide financial education and guidance to help individuals make informed decisions about their assets and investments, taking into account the impact of inflation.
And, if you think that’s too much effort, download our app and we’ll do the rest.
We will create customized portfolios for you to combat the eroding effects of inflation by diversifying investments in inflation-hedged assets like gold and REITs. Not just that, we will also regularly monitor those investments and make adjustments to align with your financial goals with the ever-evolving market conditions.
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