Investing in the era of inflation: Do you really know that the value of money is depreciating?

Last month, how much could your money buy? This month? Probably less for sure. This phenomenon is called inflation, which affects each person’s purchasing power, especially those who sit on their money without investing.

Rising prices but unbalanced economy

Inflation occurs when the prices of goods and services increase continuously. From another perspective, it means the real value of money is decreasing. This means that 50 baht, which could buy three bowls of rice before, might only buy one bowl now.

This phenomenon didn’t happen overnight but is a process that has accumulated over many years. For example, the price of red pork in 2021 was 137.5 baht/kg, but in 2022 it increased to 205 baht/kg. The price of liquefied petroleum gas (LPG) throughout 2022-2024 rose from 393 baht per tank to 423 baht per tank. Another example is diesel oil, which in 2022 was 34.94 baht/liter, and in 2024 increased to 40.24 baht/liter.

Who benefits and who loses?

Merchants, entrepreneurs, and shareholders benefit greatly because they can adjust their prices according to market conditions. However, salaried employees are disadvantaged because their wages often increase at a lower rate than inflation.

The root causes of current inflation

The demand for goods increased sharply as the global economy recovered from the COVID-19 pandemic. The phenomenon of “Revenge Spending” (spending to compensate for the past) further drove demand higher. But production couldn’t keep up. Outside factors include rising production costs due to higher crude oil prices, natural gas, and commodities in the global market.

Supply chain issues (Supply Chain Disruption) are another cause. The shortage of containers and semiconductor chips has significantly increased transportation and manufacturing costs.

According to IMF data as of January 2024, the global economy is expected to grow by 3.1% in 2024 and 3.2% in 2025, slightly above previous forecasts. However, growth remains below the historical average due to tight monetary policies and shrinking financial support.

What is inflation measured by?

Every month, the Ministry of Commerce collects data on the prices of 430 goods and services to calculate the Consumer Price Index (CPI), which is the main indicator used to determine the overall inflation rate.

For example, as of January 2024, the Consumer Price Index was 110.3, an increase of 0.3% from January 2023 (Base year 2019 = 100). The overall inflation rate (YoY) was 1.11%, a continued decline for the fourth month, the lowest in 35 months, due to falling energy and fresh food prices.

Deflation: the opposite of inflation

If inflation is rising prices, deflation is the continuous decrease in the prices of goods and services. It results from decreased demand or insufficient money circulation.

Both conditions, if prolonged and severe, can lead to economic decline. The difference is that moderate inflation helps businesses expand, while deflation causes everyone to delay investments, reduce purchases, and halt job creation.

Impact on citizens and the country

Increased cost of living reduces people’s purchasing power and their ability to buy goods.

Entrepreneurs are confused as rising prices lower sales, increase production costs, and some delay investments, reduce staff, leading to higher unemployment.

National development slows down as people buy less, businesses can’t sell, and investment in capacity building is delayed. The economic structure weakens.

What if the economy enters Stagflation?

“Stagflation” is a situation where inflation occurs alongside economic stagnation. It causes people to spend less, businesses to sell less, profits to decline, and a lack of confidence to expand operations. Companies may lay off workers, unemployment rises, and eventually, businesses close. This is a scenario nobody wants.

Currently, the Thai economy has not entered this phase, but monitoring news is essential for investors.

How to cope with inflation

Adopt an aggressive investment plan

During inflation, deposit interest rates are low. Investing in assets with higher returns, such as stocks, mutual funds, or real estate, is a way to protect your money.

Avoid bad debt

Debt that doesn’t generate income is harmful. Plan your spending carefully and avoid unnecessary purchases.

Invest in secure assets

Gold is considered a real store of value that doesn’t depreciate over time. When inflation is high, gold prices tend to rise accordingly.

Follow news closely

Inflation and changes in monetary policy affect all investment strategies. Staying informed helps you make timely decisions.

What to invest in during high inflation?

High-interest fixed deposit

A fixed deposit account with a high interest rate provides a better return than other assets.

Real estate funds (REIT)

Rental rates move with inflation, so they are less affected by stock market volatility. Investors receive dividends and capital gains, but thorough research is necessary before investing.

Floating rate bonds

Choose Floating Rate Bonds or Inflation-Linked Bonds that adjust interest rates according to inflation. Select bonds with high credibility.

Gold and CFD Trading

Gold prices tend to rise with inflation. CFD trading allows you to “speculate on both rising and falling prices” without owning the actual asset.

Stocks benefiting from inflation

Bank stocks profit from increased net interest margins when interest rates rise.

Insurance stocks hold investments in government bonds, whose returns move with inflation.

Food stocks benefit because they are essential goods and have pricing power.

Summary

Inflation generally helps the economy grow, but if it becomes excessive (Hyper Inflation), it turns into a situation similar to deflation and damages the system.

Smart investors can profit by investing in stocks or assets that benefit from inflation. Therefore, monitoring economic news and adjusting investment strategies accordingly is essential.