Understanding Inflation: Its Impact on Investments and How to Cope

What is Inflation? How It Works in the Real Economy

Inflation (Inflation) is an economic phenomenon where the prices of goods and services increase continuously over a period, which means the value of money decreases, causing the same amount of money to buy fewer items than before.

A simple example: Mr. A had 50 baht initially and could buy several plates of rice, but today the same 50 baht only buys one plate. This illustrates the effect of inflation.

Inflation is not just an economic indicator; it is a key factor that investors must consider when making investment decisions in the stock market. Changes in the inflation rate influence the market in ways that cannot be ignored.

Who Benefits and Who Loses from Inflation

Beneficiaries: Entrepreneurs, traders, and those with flexible income because they can raise prices of goods and services according to market conditions, giving them pricing power.

Losers: Salaried employees, as their wages tend to increase more slowly than inflation, reducing their purchasing power year over year.

Why Does Inflation Occur? The Three Main Causes

1. Demand Pull Inflation - Demand exceeds supply

When consumers’ demand for goods and services increases but supply in the market is insufficient, sellers see an opportunity to raise prices.

2. Cost Push Inflation - Rising production costs

Production costs increase due to factors such as crude oil prices, natural gas, steel, and copper. If costs rise too much, producers pass the costs onto consumers through higher prices.

3. Printing Money Inflation - Excessive money printing

When the government prints more money without backing assets, it leads to severe inflation.

Current Factors Causing Global Inflation

The global economy is experiencing intense inflation due to several interconnected factors:

• Faster-than-expected economic recovery after the COVID-19 downturn, with consumers having accumulated savings and eager to spend (revenge spending), while production remains slow.

• Supply Chain Disruptions (Supply Chain Disruption) such as container shortages, transportation issues, and chip shortages, especially during the work-from-home period.

• Rising energy prices with crude oil prices shifting from record lows in 2020 to record highs after countries reopened, coupled with export restrictions.

• Geopolitical tensions like the Russia-Ukraine war, which have driven up energy and food costs.

According to the International Monetary Fund (IMF), as of January 2024, the global economy is expected to grow by 3.1% in 2024 and 3.2% in 2025. Although higher than previous forecasts, these growth rates remain below historical averages due to tight monetary policies and reduced financial support.

Disinflation ≠ Deflation

Disinflation (Disinflation) means the rate of price increase is slowing down, but prices are still rising.

Deflation (Deflation) is a continuous decline in prices of goods and services, which is damaging to the economy because consumers wait for prices to fall before purchasing, leading to decreased sales and profits. Businesses cut production and lay off workers, ultimately causing economic stagnation.

Impact of Inflation on Thailand’s Economy and Daily Life

For Citizens

Living costs have risen due to key goods such as meat, oil, fresh vegetables, and cooking gas, reducing purchasing power.

For example, specific product prices:

• Red pork: 137.5 baht/kg (2021) → 205 baht/kg (2022) → 133.31 baht/kg (2024)
• Chicken breast: 67.5 baht/kg (2021) → 105 baht/kg (2022) → 80 baht/kg (2024)
• Diesel oil: 28.29 baht/liter (2021) → 34.94 baht/liter (2022) → 40.24 baht/liter (2024)
• Gasohol: 28.75 baht/liter (2021) → 37.15 baht/liter (2022) → 39.15 baht/liter (2024)

Thailand’s Consumer Price Index (CPI) from the Office of Trade Policy and Strategy in January 2024 was 110.3 (base year 2019=100), an increase of 0.3% from the same month last year.

( For Entrepreneurs

Sales have decreased as consumers buy less, while production costs have increased. PTT Public Company Limited benefits when oil prices rise, with revenue of 1,685,419 million baht and net profit of 64,419 million baht in the first half of 2022, growing 12.7% compared to the previous year.

This type of business benefits while other sectors may experience downturns.

) For the Country

If Thailand enters a Stagflation (high inflation + economic slowdown), it will lead to layoffs, higher unemployment, and some businesses shutting down, resulting in slow GDP growth—an undesirable situation.

However, Thailand has not yet fully entered stagflation but must closely monitor economic news.

Strategies to Combat Inflation: 4 Keys to Investment Power

1. Smart Investment Planning

Don’t be discouraged by low deposit interest rates. Invest in assets with higher returns, such as stocks, mutual funds, or real estate.

( 2. Avoid Unproductive Debt

Be mindful whenever you reach for your wallet. Reduce unnecessary purchases and create a strict budget.

) 3. Seek Stable Assets

Invest in gold, which always has intrinsic value and appreciates as inflation rises.

4. Stay Informed

Changes in inflation data directly impact your investment decisions.

What to Invest in During Inflation

( Bank Stocks

Benefit from rising interest rates as net interest margins increase.

) Insurance Stocks

Invest in low-risk assets like government bonds. When inflation rises, bond yields also increase.

Food Stocks

Since consumers need to buy food, food companies have pricing power and benefit from price hikes.

Real Estate Funds

Rental rates increase with inflation and are less volatile than stock markets, suitable for investors seeking stability.

Floating Rate Bonds or Inflation-Linked Bonds

Interest payments adjust according to inflation rates, providing returns that track inflation.

Gold

Price movements tend to follow inflation trends; as inflation rises, gold prices tend to increase. Trading CFD gold allows speculation on both rising and falling markets without owning the physical asset.

A Look Back at Thailand’s Inflation History: Lessons from the Past

In 1974, Thai inflation soared to 24.3% due to the Middle East war. In 1980, it again reached high levels due to the Iran-Iraq war.

In 1997, the economic crisis caused the Thai baht to depreciate, pushing inflation up to 7.89%. Since then, Thailand has mostly kept inflation below 5%, reaching 5.51% in 2008 before tightening again.

Most recently, in May 2022, inflation hit 7.10% due to the Russia-Ukraine war.

Summary

Inflation when well-controlled can promote economic growth, but if it escalates to Hyperinflation, it becomes a disaster.

Smart investors seek opportunities in stocks and assets that benefit from inflation, replacing low-interest deposits.

Inflation is not just an economic phenomenon; it is a crucial signal for investors to adapt and plan wisely. Continuously follow economic news to seize opportunities and avoid risks.