Understanding Inflation: The True Causes and How to Prepare

Price Fluctuations: Inflation and Deflation

In an ever-changing economic world, both investors and consumers must face the phenomenon known as inflation (Inflation), which refers to the continuous rise in the prices of goods and services. This not only reflects the decreasing value of our money but also impacts investment decisions and financial planning, especially when compared to deflation, which is the opposite scenario.

Main Causes of the Current Inflation

Currently, the global economy is experiencing inflation caused by various factors. The first is increased demand (Demand Pull Inflation), which occurs after the economy recovers from strict measures. Many consumers have accumulated savings, while producers are unable to meet the soaring demand, leading to price hikes.

The second factor is rising production costs (Cost Push Inflation). Prices of key raw materials worldwide, such as natural gas, crude oil, steel, and copper, have increased significantly. Additionally, supply chain disruptions (Supply Chain Disruption) have further raised transportation and manufacturing costs.

The third factor results from the large-scale issuance of money by the government (Printing Money Inflation), which causes the money supply to outpace the available goods.

According to IMF reports as of January 2567, the global economy is expected to grow by 3.1% this year. Although slightly higher than previous forecasts, it remains below the historical average due to tight monetary policies and reduced financial support.

Clear Differences Between Inflation and Deflation

Deflation is considered more damaging to the economy because it leads to delayed investments, reduced employment, and economic downturn.

Who Benefits and Who Loses from Inflation

Beneficiaries:

• Entrepreneurs and business owners, as they can raise prices in line with inflation.
• Shareholders, especially those in sectors that benefit from inflation.
• Debtors, since the amount they owe decreases in real value.

Those who suffer:

• Employees, as their salary increases lag behind inflation rates.
• Creditors, who receive repayments worth less than before.
• Savers, as inflation erodes the value of their savings.

How Inflation Impacts the Economy

Impact on the General Public

Higher living costs mean that the same amount of money buys fewer goods. For example, 50 baht two years ago could buy many bowls of rice, but now only one. Such accumulated issues reduce household purchasing power, leading to more cautious spending.

From the table of essential daily goods prices, we see that:

• Red pork: increased from 137.5 baht/kg (Year 2021) to 133.31 baht/kg (Year 2024)
• Cooking gas: surged from 318 baht per tank to 423 baht per tank during the same period
• Gasohol: increased from 28.75 baht/liter to 39.15 baht/liter

Impact on Entrepreneurs and Stock Markets

When inflation is high, many companies, especially oil and gas firms, benefit from rising prices. For example, PTT Public Company Limited (Public) in the first half of 2565 reported a net profit of 64,419 million baht, a 12.7% increase, with 24% of profits from PTT’s own operations.

However, small and medium-sized enterprises may face difficulties as rising costs and declining consumer purchasing power lead to reduced sales and potential layoffs.

Long-term Effects on the Country

If inflation persists for too long, it may lead to “Stagflation,” a situation characterized by high inflation and sluggish economic growth, resulting in rising unemployment. Consumers spend less, businesses sell less, investments decline, and layoffs increase, potentially causing business closures. These conditions slow down GDP growth.

Government and Central Bank Measures to Combat Inflation

Monetary Policy: The central bank raises policy interest rates to withdraw excess money from the system, reducing the money supply.

Fiscal Policy: Ban price hikes for scarce goods, control essential commodities, and provide assistance to highly affected populations.

Monitoring Consumer Price Index (CPI): Every month, the Ministry of Commerce collects data on 430 items to calculate CPI. The year-on-year increase in CPI (Year-on-Year) reflects overall inflation, which the Bank of Thailand targets.

As of January 2567, CPI stands at 110.3, up 0.3% from the previous year. The overall inflation rate (YoY) is 1.11%, the lowest in 35 months, due to energy prices decreasing from government cost-reduction measures and fresh food prices falling after increased production.

Historical Inflation Rates in Thailand

Looking back, Thailand experienced inflation as high as 24.3% in 2517 during the Middle East oil crisis. After the 2540 economic crisis, the baht depreciated, causing inflation to reach 7.89%. Since then, Thailand has kept inflation below 5% for extended periods until 2551, when it rose to 5.51% due to the oil price crisis, and most recently in 2565, reaching 7.10% amid the Russia-Ukraine war that pushed energy prices higher.

Investment Strategies During High Inflation

Lock interest rates through fixed deposit accounts

When inflation rises, deposit interest rates naturally increase. This means that opening a fixed deposit now locks in relatively good interest rates without risk.

Beneficial sectors for inflation

Bank stocks: Banks profit from higher net interest margins (Net Interest Margin) as interest rates increase.

Insurance stocks: Insurance companies investing in government bonds (Government Bonds) benefit from higher yields in line with inflation.

Food and energy stocks: These companies can adjust prices according to inflation, maintaining profitability.

Inflation-linked securities

Floating Rate Bonds: Interest rates adjust according to market rates.

Inflation-Linked Bonds: Interest increases with inflation, protecting against erosion of value.

Real estate and gold

Real estate: Rental income adjusts with inflation and is unaffected by stock market fluctuations.

Gold: An asset whose price rises with inflation. Investors can speculate via CFDs, benefiting from both upward and downward price movements.

How to Prepare for Inflation

• Reduce bad debt: Avoid unnecessary purchases and control expenses.
• Invest for returns: Savings not invested erode due to inflation. Invest in assets with returns exceeding inflation.
• Stay informed: Central bank policies, energy price changes, and economic events influence investment decisions.

Summary: Understanding Inflation and Deflation

Moderate inflation signals economic growth, allowing entrepreneurs to profit and hire more workers. However, if inflation becomes excessive, leading to “Hyperinflation,” it results in Stagflation—a situation to be avoided.

Conversely, deflation appears as falling prices but is dangerous because it causes consumers to stop spending, businesses to halt investments, employment to decline, and the economy to stagnate.

Since both inflation and deflation negatively impact the economy if they become severe, investors should closely monitor economic news, plan investments carefully, and select assets suitable for each economic condition to prevent their investments from being eroded by inflation.