MENU SAVING AND INVESTMENT Subscribe now

SAVING AND
Your Money BUDGET LIVING TAXATION EXPERT COLUMNS COMMUNITY TIPS CRYPTOCURRENCY
INVESTMENT

Your Money

SAVING AND
INVESTMENT BUDGET LIVING TAXATION EXPERT COLUMNS COMMUNITY TIPS CRYPTOCURRENCY

Advertisement

EXPLAINER
Search the site

UAE: How does inflation or What are you looking for?

deflation make a difference in All Categories

This website stores cookies on your computer. These cookies are used to improve your experience and provide more personalized service to OK

daily living and your expenses?

you. Both on your website and other media. To nd out more about the cookies and data we use, please check out our Privacy Policy.
Search

How you can use in ation and de ation to your advantage and make the most
of it
TRENDING
Published:  March 18, 2021 11:00
Justin Varghese, Your Money Editor
SPECIAL REPORT

UAE: Proven
prudent credit
card tips, tricks
and hacks

Watch: Buy gold

now! Price to rise
after current dip

UAE: How 17-year-

old stock trader
tripled Dh11k
savings

How Indian expat

retired with 5
years of savings in
UAE

China clamps
down on
cryptocurrency
heavily, but why?
Image Credit: Shutterstock

ALSO IN THIS PACKAGE UAE NRIs:

Remitting to and
from India? Know
Rules of thumb: Go-to money guidelines that apply to tricky routine nancial the limits
needs

UAE: All you need to know when exchanging foreign currency Advertisement

UAE: How much extra is your online platform charging you for your
remittances?

Bitcoin: To buy or not to? Top billionaire Warren Buffet still won’t buy – here’s
why!

UAE: Struggling to pay your loans? Here's what experts suggest you should
do

UAE: Gold prices set to steeply drop in March, buyers seen rushing to buy

Given that global economies are facing tough times, now would be a good
time to revisit the concept of in ation and especially de ation, while looking
at how you can use them to your advantage.

In ation, when simply put, is when prices rise, and

de ation is when prices fall.
The balance between the two economic conditions, opposite sides of the
same coin, is delicate and an economy can quickly swing from one condition
to the other.

So while in ation is essentially a measure of how quickly the price of goods in

an economy is increasing, de ation is the speed at which prices for goods
and services drop – occurring when the in ation rate fall below zero per cent.
RELATED STORIES
Let’s now look at these increasingly relevant and relatable economic
concepts in detail and how one can make the most out of them. ANALYSIS

UAE: Can I take

How in ation translates to consumers money advice
from social
Breaking it down logically, in ation happens when goods and services are in media?
high demand, thus creating a drop in availability and being charged higher
ANALYSIS
than usual.
Rent freeze vs.
Advertisement
rent cap: Which
works better for
you

ANALYSIS

UAE: Making
sense of complex
nancial news

EXPLAINER

UAE: How can I

make money
using af liate
marketing?
There are a number of reasons why supplies can decrease – it could be a
natural disaster that can wipe out a food crop, a housing boom can exhaust ANALYSIS
building supplies, and so on. Whatever the reason, consumers are willing to UAE: Time to buy
pay more for the items they want and manufacturers and service providers gold? Prices set to
fall further
will want to charge more.

How much
WHEN DOES INFLATION HAPPEN? money can I
make investing in
Inflation happens when goods and services are in high demand, thus creating a drop UAE real estate?
in availability and being charged higher than usual. ere are a number of reasons
why supplies can decrease – it could be a natural disaster that can wipe out a food
crop, a housing boom can exhaust building supplies, and so on.

In ation is often seen as a big threat, but in reality, in ation can be good or
bad, depending on the reasons and level of in ation. In fact, a complete lack
of in ation can be quite bad for the economy.

In ation lowers your standard of living if your income doesn't keep pace with
rising prices. Most of the time, it rarely does. But if in ation is around 2 per
cent, then people buy things now before prices go up in the future. That can
spur economic growth.

Even when it's mild, in ation always impacts your life.

The concept of in ation is broadly classi ed into two based on the underlying
causes.

Cost-Push In ation
Cost-push in ation is when prices rise as a result of rising costs of production
and raw materials.

Cost-push in ation is usually more temporary than other sorts of in ation

and therefore central banks are more likely to leave interest rates alone if the
cause of a high in ation rate is deemed to be cost-push.

In ation
Image Credit: Stock photo

Economists argue that short-term cost-push in ation often leads to long-

term high in ation down the line, triggered by wage increases that come in
response to the initial bout of cost-push in ation.

Demand-Pull In ation
Demand-pull in ation is a type of in ation that occurs when aggregate
demand grows rapidly, outpacing aggregate supply.

WHEN DOES DEMAND-PULL INFLATION OCCUR?

When demand soars above supply, this leads to prices rising to increase profits.
Demand-pull inflation usually occurs when the economy is at almost full
employment levels.

Major consequences of in ation

• Income redistribution: One risk of higher in ation is that it has a regressive
effect on lower-income families and older people in society. This happens
when prices for food and domestic utilities such as water and heating rises at
a rapid rate.

• Falling incomes: With millions of people facing a cut in their wages or at

best a pay freeze, rising in ation leads to a fall in incomes.

• Negative real interest rates: If interest rates on savings accounts are lower
than the rate of in ation, then people who rely on interest from their savings
will be poorer.

• Cost of borrowing: High in ation may also lead to higher borrowing costs
for businesses and people needing loans and mortgages as nancial markets
protect themselves against rising prices and increase the cost of borrowing
on short and longer-term debt.

• Risks of wage in ation: High in ation can lead to more demands for a pay
hike as people look to protect their real incomes. This can lead to a rise in
labour costs and lower pro ts for businesses.

Image Credit: Shutterstock

• Business competitiveness: If one country has a much higher rate of

in ation than others for a considerable period of time, this will make its
exports less price competitive in world markets. Eventually this may show
through in reduced export orders, lower pro ts and fewer jobs, and also in a
worsening of a country’s trade balance.

• Business uncertainty: High and volatile in ation is not good for business
con dence partly because they cannot be sure of what their costs and prices
are likely to be. This uncertainty might lead to a lower level of investment
spending.

BUSINESS COMPETITIVENESS

If one country has a much higher rate of inflation than others for a considerable
period of time, this will make its exports less price competitive in world markets.

How to protect oneself from in ation?

• Invest in in ation-linked bonds: There are an increasing number of
in ation-linked bonds offered by the most government treasuries that
provide built-in ways to protect yourself from in ation.

These automatically rise in value along with in ation. If you're anxious about
in ation, you'll get peace of mind if you own some of these.

• Invest in gold: The price of gold is frequently used as a hedge against

in ation, but gold prices are affected by a lot of other things as well. Since it's
traded on the commodities market, it's more volatile.

As a result, its prices don't rise and fall with other asset classes. That makes it
good for a diversi ed portfolio. That’s the main reason why you should invest
in gold.

Gold
Image Credit: Pexels

• Invest in stocks: On the other hand, the best protection is a well-diversi ed

portfolio that includes stocks. The stock market historically outperforms
in ation.

Despite the lack of con dence most people express about stocks, owning
some equities can be a very good way to combat in ation.

Think of your household as a business.

If a company cannot properly invest its money in projects that will deliver a
return above its costs, then it, too, will fall victim to in ation.

The basic premise of business success is that corporations will sell their
goods at increasing prices, which will lead to elevated revenues, earnings,
and inevitably, stock prices.

• Invest in commodity: Some of the best stocks to own during in ation

would be in companies that can increase their prices naturally during
in ationary periods. Commodity resource companies are one example.

Products like oil, grains, and metals enjoy pricing power during periods of
in ation. The prices of these items tend to go up as opposed to, for example,
the price of a computer, which is subject to manufacturer and distributor
price adjustments.

Look to invest in businesses such as commodity rms or healthcare

companies that possess the strongest pro t margins and, generally, the
lowest cost of production. Finally, never underestimate the value of dividends
during periods of in ation. Dividends increase the total return of a portfolio.

• Invest in a home: When done for the right reasons, like buying a home to
live in, real estate is always a good investment. Problems occur when a
buyer's goal is to ip the property they just bought at a pro t.

Although experienced real estate investors are able to nd hidden values in

properties, the average person should focus on purchasing a home with the
intent of holding it, even if only for a few years.

Handing over the keys

Image Credit: Gulf News archives

Real estate investments do not typically generate a return within several

months or weeks; they require an extensive waiting period in order for values
to increase. As a home buyer, unless you're paying cash, you're likely to put
some money down and take out a loan, known as a mortgage, for the
remainder of the purchase price.

Like land, home prices tend to increase in value on an average year-over-year

basis. It is true that real estate bubbles are usually followed by correctional
periods, sometimes causing homes to lose over half of their value. Still, on
average, housing prices tend to increase over time, counteracting the effects
of in ation.

Impact of de ation on daily lives

De ation is basically what happens when too many goods are available or
when there is not enough money circulating to purchase those goods. What
then happens is the price of goods and services drops. While this may seem
like a great thing for shoppers, the actual cause of widespread de ation is a
long-term drop in demand.

IMPACT OF DEFLATION ON DAILY LIVES

For instance, if a particular type of gadget becomes highly popular, other

manufacturers start to make a similar gadget to compete. Soon, companies have more
of that gadget style than they can sell, so they must drop the price to sell the goods.
Companies that find themselves stuck with too much inventory must cut costs,
which often leading to job cuts. Unemployed individuals do not have enough money
available to purchase items; to coax them into buying, prices get lowered, which
continues the trend.

So one of the major downside of de ation could be that it costs you your job.
If prices continue to decline, your employer may not be able to remain
pro table. To stay in business, there may be layoffs.

If de ation continues long enough, many more people will lose their jobs. As
the economy slows, companies go out of business. That’s what happened
during the Great Depression. Falling prices sent many rms into bankruptcy.

De ation often signals an impending recession (two or more quarters during

which the economy shrinks). With a recession comes declining wages, job
losses, and big hits to most investment portfolios.

As a recession worsens, so does de ation.

Businesses hawk ever-lower prices in desperate attempts to get consumers
to buy their products and services.

De ation is worse than in ation because interest rates can only be lowered to
zero. As businesses and people feel less wealthy, they spend less, reducing
demand further. Prices drop in response, giving companies less pro t.

Once people expect price declines, they delay purchases as long as possible.
They know the longer they wait, the lower the price will be. This further
decreases demand, causing businesses to slash prices even more. It is a
vicious, downward spiral.

Deeper effects of de ation on economy

De ation can lead to an economic recession or depression, and the central
banks usually work to stop de ation as soon as it starts.

When credit providers detect a decrease in prices, they

often reduce the amount of credit they offer.
This creates a credit crunch where consumers cannot access loans to
purchase big-ticket items, leaving companies with overstocked inventory
and causing further de ation.

But this is when a prolonged de ation comes into play. What we will go
through next is how as a consumer one can make the most of or take
advantage of de ation.

De ating de ation
Here are four ways to survive — and even thrive — in a de ationary economy.

. Creating emergency funds

. Grip on nances

. Get out of debt

. Seek opportunities

Creating emergency funds

Most nancial experts recommend consumers have a rainy day fund of three
to six months of living expenses in cash tucked away for emergencies, such
as a sudden job loss.

With unemployment rising, some advisers are raising that target to six to
nine months. Switching to a saver’s mind-set may be a challenge for some
spenders.

Image Credit: Supplied

But for many people, the process is under way already. Consumers are being
more cautious as a result of the drop in the nancial markets and
heightened fears of a deep recession.

Tightening your wallet now actually can pay off later. For example, people
who spent less during the holiday season are likely to reap the bene ts of
sales in the start of the new year.

Grip on nances
Getting a rm grip on your nancial situation can help ease fears that rear up
when headlines turn unrelentingly bleak. An advice that nancial planners
frequently advise consumers is that – there’s not a lot that we can control,
but we can control what we spend.

Most nancial experts advise consumers to draw up a budget if they don’t

already have one. This reveals where spending is going and helps consumers
make adjustments. If you don’t like budgets, there are other ways to get your
nances on track.

Save for speci c nancial goals by setting up automated transfers from your
main bank account to a second account. Money in the second account can
be earmarked for speci c goals, such as college funds for your children, a
retirement nest or vacation money.

There are a number of software available out there — a couple being

Microsoft Money and Quicken — that can help you track where money goes.
These tools tie together your accounts and offer a clear picture of your
nancial bottom line.

Get out of debt

In a de ationary economy, dollars, or whatever the currency, are worth more
going forward. That’s because falling prices allow each currency to buy more
in the future. People worried about de ation want to avoid debt because
de ation would make paying off a loan even more expensive.

HOW DEFLATION AFFECTS DAILY LIVING?

For example, in a deflationary economy, a computer that sells for $1,000 (Dh3,673.20)
today might carry a price tag of $990 (Dh3,636.47) next year. Or, if you buy a car for
$20,000 (Dh73,464) today, you might be able to buy a better car for $20,000 next year.

However, while prices in a de ationary economy go down,

the amount of your loan does not.
Consumers can take many different steps to lessen their debt burden
quickly. If you carry a balance on high-rate credit cards, try to transfer it to a
zero-percentage-rate card and pay down the debt as soon as possible.

Ridding yourself of debt can go a long way toward alleviating your nancial
fears during a de ationary economy.

Speak to a nancial planner to ensure your nest egg will withstand the risks of in ation
Image Credit: Shutterstock

Seek opportunities: Consumers who have secure jobs, emergency funds set
aside and sound nancial plans may nd that a de ationary economy is a
great place to scoop up bargains. Falling prices already are creating
opportunities.

People beginning to build an investment portfolio now have a chance to buy

stocks of solid companies at bargain prices. De ation also can offer
opportunities to save on smaller purchases.

For example, travelers may nd trips offered at big discounts. By investing in

assets when prices are low, consumers can use an episode of de ation as a
rare opportunity to build wealth, many experts remind.

Go back to top

Network links: Baby & Child Friday Inside Out Watch Time Wheels getthat GN Tech Jobs

About Gulf News Terms and Conditions Advertise with us Gulf News epaper
Find us on Social

Contact us Privacy Policy Reach by GN Sitemap

Work with us Gulf News store GN Focus Have your say

© Al Nisr Publishing LLC 2021. All rights reserved.