How does Islam Tackle Inflation?

3. Inflation is caused either by having surplus means of payments (including mainly quantity of money in a society) or shortage of general supply. In other words, it deals with supply and demand but in a general matter that touches all goods and services in economy. It may occur in a society that deals with usurious transactions, at the same time it may happen in an interest-free society.

Sharia does not approve of any action on the part of people (rarely, such as withdrawal of metal currency for other industrial uses) or government (very often, printing more money to finance its expenses or internal debt payment) even if such action is deemed a solution to a problem, for any solution, in Islamic economy, must not involve interest. Indexation is suggested but the International Fiqh Academy refused it because it may be taken as a justification for interest. In fact, it’s very often intermingled with interest.

Arbitration is suggested by some `Ulama, especially in the end of 12th century of Hijrah. Arbitration can be imposed by courts and certain rules can be set for it. In my opinion this is the best solution because the effect of inflation on people varies; as some become richer, well-off, and get higher income, others become poorer and get lower income. In loans, and bank deposits, indexation is completely unacceptable, since any indexation in loans is interest.