What causes inflation? Investors should know before planning their investments

The global economy is currently facing a seemingly simple situation, but one that deeply impacts everyone’s financial standing. That is, What causes inflation? As prices of goods continue to rise, this article will help you understand what inflation is caused by and what you should do to prevent your money from losing value in this environment.

Why are prices rising? What exactly causes inflation?

Inflation is not just a phenomenon of rising prices but an economic condition where the value of money continuously decreases. The result is that when you take 50 baht to buy the same items you could buy before, today you can only buy one item.

What causes inflation? There are three main reasons:

1. Increased demand for goods (Demand Pull Inflation)
After the economy recovers, people return to spending but want to buy more, causing demand to exceed supply. Sellers then take this opportunity to raise prices.

2. Rising production costs (Cost Push Inflation)
Prices of oil, natural gas, steel, copper all increase due to supply chain disruptions. Producers bear these costs and are forced to raise their prices.

3. Excessive money printing (Printing Money Inflation)
When the government releases too much money beyond actual demand, the money supply in the system increases, leading to higher overall prices.

How is the global economy doing now?

IMF economists forecast that the global economy will grow moderately at 3.1% in 2024 and 3.2% in 2025. The good news is that inflation rates are decreasing from their peaks. However, as of January 2024, Thailand’s Consumer Price Index (CPI) still increased by 1.11% year-on-year.

The decline is attributed to government measures to reduce energy costs and the drop in fresh food prices. But looking ahead, risks remain due to geopolitical tensions.

Is inflation rising or falling? Let’s look at the actual numbers.

Looking back at Thailand’s inflation history:

• 1974: 24.3% (Israeli War)
• 1998: 7.89% (After economic crisis)
• 2022: 7.10% (Russia-Ukraine War)

And key market prices in Thailand:

• Red pork: increased from 137.5 THB/kg (2021) to 133.31 THB/kg (2024)
• Diesel fuel: surged from 28.29 THB/liter (2021) to 40.24 THB/liter (2024)
• Chili peppers: fluctuate from 45-250 THB/kg depending on the season

Who benefits from inflation? Who suffers?

Beneficiaries:

• Business operators: can raise prices according to the situation
• Shareholders and business owners: companies like PTT made a profit of 64,419 million THB in the first half of the year. For example, bankers benefit from increased interest margins
• Debtors: if you borrow money, you repay with less valuable money

Disadvantaged:

• Salaried workers: salary increases do not keep pace, so inflation erodes their purchasing power
• People with savings: old money in their wallets loses value over time if not invested

What should you do when inflation appears?

1. Avoid leaving money idle

Low deposit interest rates mean your money leaks away. Invest to achieve returns higher than the inflation rate.

2. Invest in stable assets

• Gold: the higher the inflation, the higher gold prices tend to be, serving as a hedge
• Real estate: rental income increases with inflation and is less volatile than stocks

3. Choose stocks that benefit from inflation

• Bank stocks: higher interest rates increase profits
• Insurance stocks: investing in bonds with higher yields
• Food stocks: essential goods that consumers need to buy, giving them pricing power

4. Floating Rate or Inflation-Linked Bonds

Interest rates adjust according to actual inflation.

5. Trade commodities that move with inflation

Trading CFDs on gold is a way to profit in both rising and falling markets.

Inflation vs. Deflation: How are they opposite?

Both at high levels are harmful to the economy and daily life.

What investors must remember

What causes inflation depends on many factors. But the key is, once you understand it, you need to act. Sitting still and watching your money lose value is worse. Therefore, knowing what causes inflation tells you about market movements, and now is your opportunity.

Always stay updated with economic news, plan your investments wisely, and remember that smart investing helps prevent your money from losing value.