The inflation rate in the UK has been the highest since 2018, reaching 2.5% this past year. This is part of a larger trend of creeping inflation which is set to hurt the pockets of the everyday person. In this article, we will explain what is behind the rise of inflation, why it is here to stay and give you practical tips on how to protect against it.
What is inflation?
Inflation is the rate at which prices in an economy increase.
Economists measure this by tracking the price of thousands of everyday items. Central banks want a small amount of inflation as they believe it encourages spending. If consumers and businesses know that the purchasing power of their money will decrease over time, they are more likely to spend it in the near term.
However high inflation rates are seen as bad for the economy for a variety of reasons. For example, the cost of living increases and businesses are unable to operate effectively due to price uncertainties. Therefore central banks exert a lot of effort to try to achieve an optimal level of inflation (in the UK this level is seen as 2%).
Why is inflation rising?
1. Supply shortages
A major cause of increased prices is global supply shortages. You may remember back in March how a container ship got stuck in the Suez Canal and brought global trade to its knees. It took 6 days for it to be freed and is estimated to have caused around $6bn of losses for global trade. It’s not just extraordinary events like the Suez Canal that are the problem.
Supply chains for many industries have been impacted, for a variety of reasons. A big one is how demand for certain products shot through the roof in covid and has resulted in shortages as the supply couldn’t keep up.
Take semiconductors – a material used for computer chips used in products such as TVs, phones, cars and gaming consoles. Their supply was initially affected by covid-induced factory closures but has since been swamped by a rise in demand over the pandemic. This has meant the supply for these products have been hit hard resulting in delays and increased prices.
In the UK, severe disruption has been caused by the Brexit deal which has resulted in a shortage of lorries and vastly increased the time taken to get through border control. This has hit the food sector hard with fresh food in particular being impacted. This has led to supermarkets amongst others warning of price rises.
In summary, the disruption to global supply chains and the increase in demand has meant that the cost of many products has risen and will continue to rise until supply chains can recover.
2. Recovering businesses
Many businesses have been hit hard by the pandemic. In a bid to recoup some of the losses and stay afloat, some businesses have raised prices. However expect even more businesses to follow suit over the coming years. This is because many businesses are delaying any price rises to allow consumer confidence to recover first.
Increased household savings and greater demand are further reasons why businesses will raise prices. Businesses in certain industries are aware that the savings of many households have increased over the pandemic and the demand for certain products has accelerated. This is definitely one area to keep an eye on and be mindful of if you have any big purchases planned in the future.
3. Government monetary policy
Government and central bank monetary policy is also a big contributor to inflation. We covered this in more detail in this article. In summary, they flooded asset markets with new money and lowered interest rates forcing savers to spend their money. Both of these actions caused prices to rise and the purchasing power of money to fall.
Inflation is here to stay
Many economists believe that the levels of inflation we are seeing won’t be temporary but will persist for many years to come. Whilst some of the price increases caused by factors such as supply shortages will likely be temporary, other factors point to a longer trend of inflation. One key driver will be high levels of consumer demand, as many households managed to save more during the pandemic and the shift to working from home will boost savings for years to come. Prices for assets such as property will generally trend upwards as well.
All things considered; inflation really is a trend that is likely to be here for the next ten years. Therefore it is really important for us to take inflation seriously and think about how to combat it. We cover some ideas on what you can do in the next section.
What can you do about it?
1. Increase your salary
Rising inflation weakens the purchasing power of your salary. So there is a genuine case to be made that your salary should rise to at least accommodate for inflation.
First, consider whether asking for a raise is likely to be the right move for you. If there is a shortage of talent for the role you do, then this could put you in a very strong position. Conversely, if there is a lot of talent available for your role, this gives you a weaker hand. In this case, you should gauge how successful you think such a request may be by taking other factors such as company culture into account and history of salary rises. Perhaps discuss first with a trusted well-placed colleague at your workplace.
If you’re unable to achieve a raise at your current workplace, consider shopping around other companies and see if there are jobs out there that can offer you your desired salary. Often receiving a higher offer elsewhere could be a really good negotiating tactic at your current business. Again this will be easier for certain industries but there is no harm in having a look.
Whether you decide to look for a raise at your current job or look elsewhere, look beyond just a one year horizon. Inflation is most likely here to stay so consider negotiating an agreement whereby your salary at least rises in line with inflation every year.
2. Make payments on your home purchase plans
A lot of Muslims will likely have home purchase plans that is costing them a certain amount of rent each month. If you have spare cash, consider either increasing your regular purchase payments or putting down a lump sum. Over the long run this will save you money in rent as it will allow you to get to full ownership quicker. This is a great use of money that would otherwise have its purchasing power fall over time.
3. Invest in assets that appreciate
In a recent article, we looked at how the rich continue to get richer and in a nutshell it is because they hold a greater proportion of assets. The poor meanwhile have more of their wealth in cash. This matters as cash is eroded over time by inflation, whilst assets such as stocks, property and commodities broadly tend to appreciate in value.
So if you have cash lying around that you don’t have need of, consider investing in assets. If you want to learn about halal investing, a good place to start is our Halal Investing 101 Guides. For investing inspiration, do check out our halal investment comparison engine.
There is a lot of evidence that inflation is here to stay over the coming years. This will hurt the purchasing power of your money. Therefore it is important to make mindful strategic decisions on how best to optimise the money that you have.