What is inflation? How does inflation affect your life, and how is deflation different?

When it comes to the economy, most people think of inflation—an ancient problem that has followed the global economy for decades. Today, we will delve into how inflation impacts our spending, investments, and daily income.

Inflation You Should Know

Inflation is a condition where the prices of goods and services continuously rise, or in other words, the value of money decreases, making the same amount of money buy fewer items.

For example, a merchant buys rice for 50 baht and gets many nice dishes. But over time, rice prices keep rising. Today, 50 baht can only buy one dish. Imagine 30 years from now, rice might cost 100 baht per dish.

This is the reality of inflation, affecting everyone every day.

Who Benefits from Inflation

Business owners or entrepreneurs with the power to adjust prices profit differently from salaried employees whose wages increase more slowly than inflation. Even with salary increases, the real value of money decreases.

Causes of Inflation in the Economy

Demand Pull Inflation

Demand for goods surges, but the market supply cannot keep up. Sellers raise prices. For example, after the world recovers from lockdowns, people want to buy goods (Revenge Spending), but factories haven’t produced enough.

Cost Push Inflation

Production costs rise, such as crude oil, natural gas, copper, steel. Producers cannot bear the burden and must raise prices. Between 2020-2022, oil prices went from record lows (record low) to highs as countries reopened.

Printing Money Inflation

The government prints too much money into the system. The money supply increases while goods do not, leading to a loss of money’s value.

Supply Constraints

Shortages of shipping containers, semiconductor chips for electronics, and disruptions in global logistics push up production costs.

Impact of Inflation on Thai People

Rising Cost of Living

Daily essentials like meat, oil, vegetables, eggs have more than doubled in price.

Compare prices:

Household purchasing power declines. Consumers become more selective, avoiding unnecessary items.

Inflation’s Effect on Businesses

When sales decline and costs rise, businesses slow expansion, reduce hiring, and unemployment increases. The benefit chain diminishes.

PTT Corporation provides a vivid example: in the first half of 2024, revenue was 1,685,419 million THB, with net profit of 64,419 million THB, growing 12.7% due to rising oil prices.

Stagflation

A situation where inflation is high but economic growth stalls. Employment fears loom. Some signs indicate Thailand is approaching this scenario.

Measuring Inflation with CPI

Every month, the Ministry of Commerce collects prices of 430 items and calculates the Consumer Price Index (CPI).

January 2024 Data:

• CPI = 110.3, up 0.3% from the previous year (Base 2019 = 100)
• General inflation rate (YoY) = 1.11%
• The lowest in 35 months

This decrease from January 2023’s 108.18 is due to falling energy, fresh vegetables, and meat prices.

Monthly comparison (MoM) shows an increase of 0.02%, driven by fuel, electricity, and transportation costs, excluding other categories.

How Deflation Differs from Inflation

Deflation is a continuous decline in prices of goods and services, often due to low demand or insufficient money circulation. Prices fall, producers hesitate to produce, and the economy stagnates.

Moderate inflation can be beneficial, but both hyperinflation and severe deflation are dangerous for the economy.

Thailand’s Inflation History

1974: Inflation exceeds 24.3% due to Middle East war and soaring oil prices.

1980s: High inflation due to Iran-Iraq war.

1997-1998: Economic crisis, baht devaluation, inflation reaches 7.89%.

2008: Surpasses 5.51%, various factors.

2022: Exceeds 7.10% due to Russia-Ukraine war.

How to Adjust When Inflation Occurs

1. Plan for Stable Investments

Interest on deposits drops; invest in assets with higher returns, such as stocks, funds, real estate.

2. Avoid Unproductive Debt

Control spending, avoid unnecessary purchases, plan financial management strictly.

3. Invest in Stable Assets

Gold is a good choice because its price moves with inflation, is relatively stable, and does not decay over time.

4. Follow Economic News

Information is a valuable resource to adjust investment strategies timely.

What to Invest in During Inflation

Bank Stocks

Profits come from interest margin (NIM). When interest rates rise, bank profits increase, boosting shareholder returns.

Insurance Stocks

Insurance companies invest in government bonds. Bond yields rise with inflation, increasing dividends.

Bonds (Floating Rate Bonds, Inflation-Linked Bonds)

Interest adjusts with inflation, protecting investment value. Choose credible bonds.

Gold and CFD Trading

Gold prices rise with inflation. CFD trading allows speculation on both rising and falling prices without owning physical gold.

Real Estate Funds

Rents follow inflation, unaffected by stock market fluctuations. Real estate investments offer stable long-term returns.

Food Sector Stocks

Food demand never decreases; it always increases. Food producers can adjust prices, increasing profits.

Summary of Inflation and Its Effects

Inflation is not always a problem. Moderate levels can stimulate economic growth. But if it reaches “Hyper Inflation,” it becomes a swamp.

Investors should understand that inflation impacts benefit some groups and disadvantage others. Investing in gold, bank stocks, insurance stocks, or special bonds may help generate profits during high inflation.

The key is to closely monitor economic news to catch critical signals and adjust investment plans accordingly.