Inflation and Deflation: Differences and How to Cope in a Volatile Economy

What does inflation mean? Looking from an investor’s perspective

During times of economic change, the term inflation refers to the phenomenon where the prices of goods and services tend to increase continuously. Simply put, it means the value of money decreases, so purchasing the same item requires more money.

For example, 50 years ago, with 50 baht, you could buy several plates of rice. But today, the same amount of money might only buy one plate. Imagine 30 years from now, the price of one plate of rice could rise to 100 baht. Globally, such price increases happen continuously, and the Thai economy is no exception.

How is inflation different from deflation?

Inflation means rising price levels, while deflation is a continuous decline in prices. When deflation occurs, consumers stop purchasing because they expect prices to fall further, leading to businesses being unable to sell goods, reducing employment, and causing the economy to decline. This is why economists hope that inflation remains at a moderate level—not too low, but not too high either.

Causes of inflation refer to demand expansion

Inflation arises from three main factors:

1. Demand-pull inflation (Demand Pull Inflation)
Consumers want more goods, but producers cannot meet the demand, so prices are pushed up.

2. Rising production costs (Cost Push Inflation)
Prices of raw materials such as oil, gas, steel, and coal increase, prompting producers to raise their prices accordingly.

3. Excessive money printing (Printing Money Inflation)
The government increases the money supply in the economy, such as during 2020-2023, when global inflation rates surged to unprecedented levels.

Real examples of inflation in Thailand

In 1974, Thailand’s inflation exceeded 24.3% due to the Middle East war causing oil prices to spike. In 1998, after the economic crisis, the baht depreciated, leading to inflation of 7.89%. In May 2022, inflation rose again to 7.10% due to the Russia-Ukraine war.

The Consumer Price Index (CPI) in January 2024 was 110.3, up 0.3% from the previous year. While fresh food prices continued to decline, energy prices increased.

Who benefits and who suffers from inflation?

Beneficiaries:

• Entrepreneurs and traders: Can raise prices and earn higher profits
• Shareholders: Company profits increase, and dividends are higher
• Debtors: Repay debts with money that has lower value

For example, PTT Public Company Limited (in the first half of 2022) reported a net profit of 64,419 million baht, an increase of 12.7% compared to the previous year, due to high oil prices.

Those who suffer:

• Salaried employees: Salary increases lag behind inflation rates
• Low-income earners: Cost of living rises while income remains fixed
• Creditors: Collect less in real value

How does inflation impact the economy and daily life?

For the general public:

Living costs rise, and consumers have less purchasing power. For example, the price of eggs increased from 4.45 baht per egg in 2021 to 3.9 baht in 2024 (2564), but the more significant impact is on meat: red pork from 137.5 baht/kg in 2021 to 205 baht/kg in 2022 (2564), and even though it decreased to 133.31 baht/kg in 2024 (2567), it remains a burden.

( For entrepreneurs: When goods become more expensive, sales decline, but production costs remain high. Some may delay investments, reduce hiring, or shut down.

) For the country: If inflation remains high for a long time, producers may hesitate to invest, slowing economic growth (GDP). This situation is called Stagflation, which nobody wants to see.

Why is it important to monitor inflation rates?

Inflation rate is a key indicator used by the central bank ###### to set monetary policy. If the central bank predicts inflation will rise or fall, it often adjusts commercial banks’ interest rates accordingly, directly affecting stock market investments.

In January 2024, IMF forecasted global economic growth at 3.1%, with a projection of 3.2% in 2025. Growth remains below historical levels due to tight monetary policies.

Investment tips to cope with inflation: Recommendations

( 1. Plan investments, not just saving money
When deposit interest rates are low, invest in stocks, mutual funds, or real estate to achieve higher returns.

) 2. Avoid unproductive debt
Limit borrowing for unnecessary purchases and have a strict spending plan.

( 3. Invest in safe assets:

• Gold: Maintains value; as inflation rises, gold prices tend to increase.
• Real estate: Less volatile than stocks; rental income increases with inflation.
• Floating rate bonds )Floating Rate Bond### or inflation-linked bonds ###Inflation Linked Bond###: Interest rates adjust according to inflation.

( 4. Invest in sectors benefiting from inflation:

• Bank stocks: Higher interest rates increase net interest margins.
• Insurance stocks: Invest in bonds; returns tend to rise with inflation.
• Food sector stocks: Essential goods with pricing power.

) 5. Keep track of economic news regularly
Inflation impacts everyone’s investment decisions. Being prepared in advance is essential.

Summary: Inflation as opportunity and risk

Inflation refers to the economic adjustment that, if managed well, can promote growth, increase corporate profits, and create jobs. However, if inflation becomes too high () (Hyper Inflation)### or drops into deflation, both scenarios are damaging to the economy.

Smart investors do not run away from inflation but profit from it by investing in sectors that benefit, gold, real estate, or floating-rate bonds. Everyone should prepare for inflation with smart financial planning.