Question: Is it permissible to accept credit above the initial loan amount to offset the effects of inflation? If so, then which inflationary index should be used? If not, then how do you suggest one recoup the losses due to the time value of money?

Answer: I understand the question to be the following: "Is it permissible to lend money and stipulate (i.e. require contractually) repayment in excess of the principal (i.e. the original amount of money that was lent), in order to offset the potential loss of purchasing power associated with inflation?" The answer is "no, it is not permissible to do so." Such a stipulated increase over principal and the transaction itself are known as riba (usury). The indicants for its impermissibility are Qur'an, Sunna and consensus (ijma`).

Note: If your debtor were to do so unilaterally--i.e. with a) no collusion between you and him and b) no compliance on his part with expectations based on impermissible cultural norms that dictate one must pay you back more money than he is lent--this would be permissible, and even a sunnah since the Messenger did this when repaying a debt. This practice is called "superior settlement [of debts]" (ahsan qada').

Note: If there is doubt on your part about whether the party is acting on a) or b) above, it is better that you not take the additional amount.

Advice: One technique that some investors use to attempt to hedge against some risks associated with inflation is the following: the lender executes a parallel transaction (e.g. a halal transaction that appears likely to yield profit) so that he can use of the profit from the second transaction in order to hedge against  potential losses associated with inflation. This of course requires putting (more) money at risk.

And Allah knows best.

Wa s-salam

The hopeful slave of Allah
Taha Abdul-Basser