When inflation arrives: Understanding the changing economic landscape

Prices of goods are rising, and our money is losing its value. Buying the same items now costs more. This is a sign that inflation is around us. This article will help investors understand this important economic phenomenon and how to adapt to minimize its impact on your money.

What is inflation? How to recognize it

Inflation (Inflation) is a phenomenon where the prices of goods and services increase continuously. From another perspective, it is the decrease in the value of money, making your money buy fewer things over time.

For example: 30 years ago, 50 baht could buy a full plate of rice, but today it only buys one plate. In another 30 years, rice prices will double. This kind of inflation affects everyone’s financial plans and investments.

Who benefits and who loses from inflation

Beneficiaries of inflation:

• Entrepreneurs and merchants can raise prices according to demand
• Banks and shareholders earn returns from investments
• Debtors, because they repay loans with money of lower value

Those at a disadvantage:

• Employees with fixed salaries, whose wages increase but not enough to keep pace with inflation
• Creditors and those holding cash, as money loses value over time
• Entrepreneurs unable to raise their prices

Why does inflation occur? The 3 main causes

1. Demand Pull Inflation – Demand exceeds supply

As the economy recovers, consumers have more purchasing power, but industries still cannot produce enough goods. The “revenge spending” (accumulated purchases) after economic downturns creates opportunities for sellers to raise prices.

2. Cost Push Inflation – Rising production costs

Prices of commodities like natural gas, crude oil, steel, and copper increase globally. Producers bear higher costs and pass them on to consumers.

Real example: In 2020, crude oil prices plummeted to historic lows, but as the economy reopened, prices surged to record highs.

3. Printing Money Inflation – Excessive money printing by the government

When there is too much money in the economy but not enough goods, prices tend to rise according to supply and demand theory.

Supply chain disruptions (Supply Chain Disruption) add further problems: shortages of semiconductors, shipping containers, leading to higher logistics costs.

Inflation in Thailand: Past and present

Thailand experienced hyperinflation of 24.3% in 1974 due to the global oil crisis. Another significant event was in 1997-1998, after the economic crisis, when the baht depreciated, causing inflation to reach 7.89%.

Recently, since January 2024, the Consumer Price Index (CPI) is at 110.3, up 0.3% year-on-year. The overall inflation rate has decreased to 1.11%, the lowest in 35 months. January 2024 was special because:

• Energy prices decreased due to government measures
• Fresh vegetables and meat prices fell due to increased production

Compared to 2023, prices of various goods have changed as follows:

Inflation vs. Deflation: Opposite but related

Deflation (Deflation) is the opposite situation, where prices of goods and services decrease continuously, leading to:

• Consumers delaying purchases, expecting prices to fall further
• Businesses reducing production and layoffs
• Economic downturn

Both conditions, if severe, can cause economic hardship and affect people’s lives.

How inflation impacts our lives

Consumers: Rising living costs

• Essential goods become more expensive: food, fuel, electricity
• Purchasing power declines
• Better planning needed for expenses

Entrepreneurs: Difficult to counteract

• Sales decline as consumers buy less
• Production costs increase
• Business expansion capacity decreases
• Some may need to lay off staff

The nation: Slow GDP growth

• When spending slows, economic growth stalls
• Prolonged high inflation can lead to “Stagflation” (high inflation + economic stagnation), which no one wants

Thailand has not yet entered stagflation but must monitor closely.

4 steps to adapt to inflation

1. Investment planning, not just saving

Low interest rates on deposits cause savings to lose value. Invest your money in:

• Stocks (long-term)
• Mutual funds
• Real estate

2. Avoid unnecessary debt

• Debt that does not generate income should be avoided
• Reduce unnecessary purchases
• Plan expenses strictly

3. Invest in stable assets

• Gold is a good hedge against inflation because its price moves in the same direction. The higher the inflation, the higher gold prices.
• Floating Rate Bonds adjust interest according to inflation rates
• Real estate rents adjust with inflation

4. Follow economic news

Inflation, interest rates, global economic signals all influence your investment decisions.

What to invest in during inflation

Bank stocks: Benefit from rising interest rates

When the central bank raises rates, commercial banks earn higher interest margins, increasing profits and dividends.

Insurance stocks: Invest in government bonds for good returns

Most insurance companies invest in bonds. When bond yields rise, their investment income increases.

Food stocks: Essential goods affected by inflation

• Food is essential; people must eat regardless of price
• Food companies have pricing power
• Benefit from inflation as revenues increase, while earlier costs may not have risen proportionally

High-interest savings accounts

• Fixed deposit accounts for 12-36 months
• Offer higher interest than regular savings
• Suitable for safety-focused investors

CFD Gold Trading: Speculate on rising and falling prices

• Gold moves in line with inflation
• CFD trading offers leverage up to 20x
• “Profit from both rising and falling markets” without owning the actual asset

Profit example from inflation: PTT Public Company Limited

In the first half of 2022, oil prices surged, and PTT Public Company Limited (Public Company) and its group earned 1,685,419 million THB, with net profit of 64,419 million THB, a 12.7% increase year-on-year.

Thus, “when inflation occurs, some businesses can generate huge profits.” Smart investors choose those stocks.

Summary: Inflation is not an enemy but a game

Inflation is often viewed negatively, but it depends on whether you adapt as a loser or a winner.

Winners: Investors, traders, companies that move quickly Losers: Cash holders, debtors, employees with stagnant wages

If inflation remains balanced (around 2-3% per year), it can promote economic growth. But if inflation exceeds 7% or leads to Hyperinflation, it becomes disastrous.

Final advice: Continuously follow economic news, adjust your financial plans accordingly, and stay curious about investment opportunities in different scenarios. Economics has many hidden games for those who are sharp.