Inflation, an economic phenomenon that affects economies worldwide, has been making headlines recently, with countries including Pakistan grappling to control its surge. In this blog, we discuss the major causes of inflation, analyze the current situation in Pakistan, and explore successful strategies adopted by other nations to combat rising prices.
In Pakistan, the Consumer Price Index (CPI) has been a matter of concern, with economists anticipating its trajectory. Three significant factors contribute to inflation: demand-supply imbalances, money supply growth (quantity theory of money), and economic mismanagement. Although the drivers of inflation, such as demand and supply imbalances and the expansion of money supply, are well-acknowledged, the factor that is frequently overlooked and significantly worsens the issue is “economic mismanagement.” The management of inflation can be executed adeptly through enacting structural reforms and implementing robust economic policymaking. The success story of Switzerland serves as an inspiring illustration of how proactive measures can effectively alleviate inflationary pressures. It’s not solely about elevating interest rates; rather, it involves addressing fundamental concerns. The global economic landscape reveals that inflation has been widespread, fueled by unexpected shocks like the Covid-19 pandemic and geopolitical conflicts. Central banks worldwide have tightened their monetary policies to tame inflation, gradually cooling it down.
In Pakistan’s economics, the exchange rate remains a crucial determinant in the inflation equation. Its volatility will significantly impact interest rates going forward.
Tackling inflation through savings and investments involves strategic financial planning and decision-making. A step-by-step approach involves understanding Inflation and its impact on your purchasing power over time. The second step entails creating a comprehensive budget that outlines your income, expenses, and savings goals. Allocate a portion of your income to savings and investments. This will help you maintain financial discipline and save consistently. In the third step: Build an emergency fund that covers 3-6 months’ worth of living expenses. This fund acts as a cushion during unexpected financial setbacks, reducing the need to dip into investments prematurely. Next is to diversify, i.e., invest your savings across different asset classes like stocks, bonds, real estate, and commodities. Diversification helps spread risk and reduces the impact of inflation on your overall portfolio. Further important is to invest for the Long Term: Inflation’s impact is most pronounced over longer periods. Investing with a long-term perspective allows your investments to potentially outpace inflation and generate real returns. For instance, our fund Unit Trust of Pakistan (UTP) has delivered an impressive annualized return of 12.91% over the past 25 years, significantly outperforming the inflation rate of 9.62% during the same period.
Historically speaking, stocks have provided higher returns than inflation over the long run. Invest in well-established companies with strong growth potential and a track record of weathering economic cycles.
Also, Real estate values and commodity prices often rise in response to inflation. Consistently contribute to your investment accounts, taking advantage of dollar-cost averaging. This strategy involves buying more shares when prices are low and fewer shares when prices are high, helping to mitigate the impact of market volatility. Lastly, regularly review your investment portfolio and financial goals. As economic conditions change, you may need to adjust your investment strategy to ensure it aligns with your objectives.
We also recommend if you’re unsure about investment strategies or portfolio diversification, consider seeking advice from a financial advisor. They can help tailor an approach that aligns with your risk tolerance and financial goals. In all cases, avoid speculative investments that promise unrealistic returns or appear too good to be true. Stick to proven investment strategies and avoid risky ventures.
By focusing on disciplined saving, prudent investment choices, and a long-term perspective, you can effectively navigate the challenges posed by inflation and work towards maintaining your purchasing power over time.