Understanding Inflation: Protecting Your Savings
3 mins read

Key Insights

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

  1. Introduction
  2. What is Inflation?
  3. Causes of Inflation
  4. The Impact of Inflation on Savings
  5. Strategies to Combat Inflation
  6. The Role of Central Banks in Controlling Inflation
  7. Tips for Young Investors
  8. Conclusion


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.

2. What is Inflation?

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:

  1. Moderate Inflation: This is a mild and manageable increase in the general price level, typically in the range of 2-3% annually. It is often considered healthy for an economy as it encourages spending and investment.
  2. Hyperinflation: This is an extreme form of inflation where prices rise uncontrollably, often exceeding 50% per month. This can lead to the collapse of a country's currency and cause severe economic turmoil.
  3. Deflation: This is the opposite of inflation. Here prices decrease over time leading to reduced consumer spending and investment causing damage to an economy.

3. Causes of Inflation

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:

  1. Demand-pull Inflation: This occurs when demand for goods and services exceeds their supply. It can be caused by increased consumer spending due to lower interest rates, increased government spending, etc.

  2. Cost-push Inflation: Arises when the costs to produce goods and services increase, and businesses pass on those costs to consumers in the form of higher prices. Examples include increased prices of raw materials or wages.

  3. Built-in Inflation: Often termed as wage-price inflation, it happens when workers demand higher wages and, if they get those higher wages, businesses then raise their prices to cover the higher wage costs.

4. The Impact of Inflation on Savings

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. 

5. Strategies to Combat Inflation

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:

  1. Invest in Stocks: Historically, equities have offered returns that outpace inflation. Diversifying your portfolio with stocks through ETFs and Mutual Funds can offer potential growth as well as beat inflation.
  2. Consider Real Assets: Investments like real estate or commodities can act as a hedge against inflation.
  3. TIPS (Treasury Inflation-Protected Securities): These are government securities designed to protect against inflation as they adjust with the Consumer Price Index.
  4. Diversify Globally: Investing in international markets can provide a hedge, especially if one's home country is experiencing high inflation.

6. The Role of Central Banks in Controlling Inflation

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.

7. Tips for Young Investors

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:

  1. Start Early: The sooner you start investing, the more time your investments have to compound, helping offset the effects of inflation.
  2. Stay Educated: The world of finance is dynamic. Stay updated with global economic trends, central bank decisions, and inflation rates.
  3. Consult Financial Advisors: Especially when starting, a seasoned advisor can provide tailored strategies to protect against inflation.


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.