Dubai: Inflation – the rise in consumer prices – is a slow erosion of your money over time. Before 2021, multiple economies worldwide haven’t seen annual core inflation much above the current level for the better part of 25 years.
So the spike seen globally in the costs of fuel, vehicles, groceries and just about everything else is the kind of sudden and systemic rise that can give a jolt to most peoples' everyday spending. With inflation chipping away at your spending power, how can you protect yourself?
Why is inflation rising?
"Inflation or rising prices is a macroeconomic (global) phenomenon, and once it happens, it could persist for some time,” said Vijay Valecha, chief investment officer at GCC-focused brokerage Century Financial.
The Continental Group, an insurance intermediary and financial services provider, in a global survey revealed that about 9 out of every 10 people worldwide believe inflation has impacted their household spending.
"The rampant inflation has undoubtedly weighed on consumer sentiment," noted Danish investment bank Saxo. "In fact, inflation expectations for the year ahead are now at record highs, while consumer sentiment is as weak as the early recovery from the Great Financial Crisis. As food prices rise, further erosion in consumer sentiment is likely to be seen."
"But thanks to savings and pent-up demand, small businesses are still generally able to pass on the rising costs to consumers to preserve their margins," the lender further noted, while adding that significant pricing power for small businesses is still intact.
Inflation now very much on investors’ radar
High inflation should be on the watch list of any prudent investor because it can seriously undervalue any investment, as well as cause a dent in future cash flow.
Even if your money is growing in value, inflation has always been one such risk that can still reduce the bottom line value of your investments.
Moreover, with inflation soaring globally, market statistics indicate that investors are tweaking their investment portfolios – and so should you.
Market experts reiterate of inflation-proofing your money by investing in assets that are likely to benefit from inflation while avoiding those that tend to be hard hit.
What’s the best course of action for investors?
“The best course of action is to stay invested,” remarked Andrew Hardy, Director of Investment Management at UK-based investment manager Momentum, when speaking at a recent webinar titled ‘Navigating the Current Geopolitical Climate’, hosted by The Continental Group.
“It’s advisable to keep your eyes on the ball and not lose sight of the bigger picture,” Hardy added. Other experts also remind investors to get behind stocks while advocating for diversification when it comes to allocating assets.
The reasoning is straight-forward, when it comes to your investments. While markets might experience sharp swings, it does not mean there are no opportunities to buy into the market’s dip. The survey also indicated around 52 per cent of respondents being open to expanding their portfolios due to inflation.
How higher taxes, loan rates influence inflation
Valecha evaluated how countries worldwide are likely to witness an increase in interest rates, in tune with the US, but added that this could slow down the global economic growth in 2022 and 2023.
“In addition, a global central bank tightening will impact mortgage (home loan) rates, and they will rise sharply in the coming months. Aspiring home buyers might be better off taking advantage of low rates by opting for a fixed loan rate.
“A factor influencing inflation is rising tax rates worldwide. Taxes are inflationary as they increase the prices of goods and services,” Valecha noted.
“Virtually no economist had predicted the current high inflationary scenario. But central banks across the world are now well aware of it and the (government stance) could help stabilise or cool the inflation in one year by reducing the demand for goods and services. It can be safely said that central banks are catching up.”
Having a lower deficit (shortage) means, that government expenditures are under control, and as a result, they don't have to depend on alternate means for financing, Valecha explained. “Tighter fiscal policy along with monetary policy is the perfect antidote for inflation.”
Bottom line: How you can protect your spending power from inflation
Although inflation hit a record high in recent months in most countries, but that's not likely to be your inflation rate. You may consume different items than the average person and you may not live in an average place, so your particular rate of inflation quite likely varies from the average.
So, rather than agonising over a single number as a spending power loss to recoup, make small money moves above to improve your financial position slowly but surely. When it comes how one can protect his or her spending power, here are five quick tips from financial planners.
1. Trim discretionary spending, voluntary spending in non-vital categories of your budgets.
2. Don't delay a major purchase as prices will likely rise.
3. Shop strategically and buy more generic brand products and prescriptions.
4. Save on necessary expenses by using coupons and store loyalty programs.
5. Another inflation-fighting idea is to buy savings bonds.
Use rewards cards to pay less for fuel – although the savings may seem too less initially, keep in mind that it adds up. Additionally, saving bonds a popular go-to option as they are available in every country worldwide specifically to protect consumers' purchasing power against inflation.
Savings bonds rates are keyed to the rate of inflation, which lately has been over the top. They are a perfect safe haven for near-term savings – and not a bad addition to your long-term nest egg, too.
A minimum investment in such bonds is minimal, and an individual can put up just thousands annually into the savings bonds with electronic purchases. The bonds pay fixed interest plus the inflation rate, adjusted twice per year.
In most cases, you can withdraw your savings without penalty after one year, but if you cash them in before five years, you'll lose the last three months' worth of interest. However, you need to check this with your bank.
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