When we are struggling to buy daily groceries or remembering the days when 2 rupees bought a handful of candies, we might think: “Why can’t the government just freeze prices forever? Why can’t inflation be 0%?”
It sounds like a dream, but economically, it’s a nightmare. A healthy economy actually needs a gentle, predictable amount of inflation (usually around 5% to 7% in Pakistan). This is because one person’s expense is another person’s income. When things get a little bit more expensive each year, it creates an engine of spending. If I want to buy a new motorcycle or a refrigerator, and I know the price will rise slightly next year, I will buy it today. Our purchase gives revenue to the local dealership, the dealership pays the factory, and the factory expands and hires more Pakistani youth.
What happens if inflation hits 0% or goes negative (Deflation)? I would say, “Why buy the motorcycle today? It will be cheaper or the same price six months from now.” If the majority stops spending, factories stop selling. When factories stop selling, they don’t give raises, they lay off workers. Therefore, 0% inflation leads straight to massive unemployment.
When inflation gets out of control, like it is right now due to the oil crisis, the State Bank of Pakistan (SBP) steps in. Its main weapon is manipulating the Interest Rate, which is essentially the price of borrowing money in simple terms.
ALSO READ: Why Our Rupee is Shrinking?
When the State Bank sees inflation rising out of its target range, it implements a High-Interest Rate Strategy. By raising interest rates significantly, buying a car on bank lease or getting a home loan becomes painfully expensive, which causes consumers to stop borrowing. Simultaneously, keeping money in a bank savings account gives high, secure returns, which encourages people to lock their cash away instead of spending it.
The ultimate result of this strategy is that cash in circulation drops, economic activity slows down, and market demand cools off. This forces shopkeepers and businesses to stop raising prices, gradually bringing inflation back down.
Conversely, when the economy slows down too much, the SBP does the opposite: it drops interest rates down. Cheap loans encourage people to happily buy cars, build houses, and take business risks. While this low-interest rate strategy floods the market with cash and explodes economic activity, it can also drive inflation back up if left unchecked!
Since you cannot stop global oil shocks or influence State Bank decisions, how do we protect our hard-earned wealth from shrinking?
Number 1: Break the Rupee Barrier by earning in foreign currency. The world has become a global village. The Internet has erased geographic borders. If you are a graphic designer, software developer, or virtual assistant, do not just look for local clients paying in Rupees. Target global platforms to earn in US Dollars or Euros or any other foreign currency. When the dollar rises due to global conflicts, your income automatically rises with it and shields you from local inflation.
Number 2: Chase Real Returns by Smart Investing. Leaving your cash sitting idle in a current or a basic, low-yield account is financial suicide during high inflation. If inflation is at 20% and your money is just sitting there, you are losing 20% of your purchasing power every year.
You must invest in assets that offer a Real Return, meaning the profit rate beats the inflation rate. Look into stocks, shariah-compliant mutual funds, gold or silver, or high-yield savings certificates that adjust with central bank rates. If your investment yields 25% while inflation is 20%, you have earned a 5% real return which keeps your head safely above water.
We, Pakistanis, are naturally very much afraid of investing and taking risks. It is vital to understand that while inflation is taking away the power of the money, understanding the system and adapting how you earn and save is the only way to make sure our rupee doesn’t shrink. Ultimately, keeping our cash in a bank isn’t avoiding risk, it’s guaranteeing a loss to inflation. As the author of “The Intelligent Investor”, Benjamin Graham, said:
“Successful investing is about managing risk, not avoiding it.”
