Understanding Inflation: What Investors Need to Know to Protect Assets

How Does Inflation Affect Your Investments

In the current economic climate, prices of goods and services are continuously rising. This is a sign of inflation occurring worldwide. Inflation is an economic phenomenon where the value of money decreases, leading to a decline in people’s purchasing power. For example, if last year 100 baht could buy 10 items, today the same amount of money might only buy 8-9 items.

For investors, this does not always mean loss. On the contrary, if you understand the mechanisms of inflation and plan wisely, you can generate profits.

Key Factors Driving Inflation in the Present World

Demand for goods has rebounded strongly after the economic slowdown, but production has not kept pace, a phenomenon called “revenge spending.” People are spending more freely than before, causing a sudden surge in demand for goods.

Additionally, production costs have increased significantly, especially for crude oil, natural gas, steel, and copper. Global supply chain issues persist, from shortages of containers to chip shortages.

Data from the International Monetary Fund (IMF) shows that the global economy is expected to grow by 3.1% in 2024 and 3.2% in 2025, but inflation rates remain above central bank targets.

Who Benefits and Who Loses

Beneficiaries

Entrepreneurs and business owners can raise prices according to the situation. Creditors (both banks and lenders) benefit because the money lent decreases in value over time. Shareholders of large corporations with bargaining power can influence prices effectively.

Real example: PTT Public Company Limited (has net profit of 64,419 million baht in the first half of the year, an increase of 12.7% compared to the previous year, driven by rising oil prices.

) Those who lose out

Employees with fixed salaries, as wage increases often lag behind inflation. Creditors ###who have lent money( must repay loans whose value has decreased, but interest rates remain high.

Important Historical Periods of Inflation in Thailand

In 1974, Thailand faced severe inflation at 24.3% due to the Middle East war causing oil prices to spike. In 1980, inflation was again high )17.8%( due to the Iran-Iraq war. In 1997, an economic crisis caused the Thai baht to depreciate, pushing inflation to 7.89%. In 2008, inflation exceeded 5.51% as commodity prices rose.

Most recently, in May 2022, Thailand’s overall inflation reached 7.10%, the highest due to the war in Europe.

How Have Essential Goods Prices Changed Over Four Years

This table clearly shows that inflation significantly impacts basic necessities. Meat prices nearly doubled, and fuel prices have risen steadily.

How Does Inflation Differ from Deflation

Deflation )Deflation( is the opposite condition, where prices of goods and services decrease continuously. Demand drops, the money supply in the system is insufficient, producers are less motivated to create goods, and the economy contracts.

Both conditions, if severe and prolonged, pose dangers to economic growth and people’s livelihoods.

How Inflation Affects Countries and Daily Life

) Effects on the General Population

Higher cost of living, reduced purchasing power, wages not keeping up, leading to decreased spending and more frugal habits.

Effects on Entrepreneurs

Goods become more expensive, sales decline, costs rise simultaneously. Some delay expansion, reduce hiring, lay off employees, and unemployment increases.

Effects on the National Economy

Productivity development slows down. If inflation is severe, real interest rates turn negative. People speculate in high-risk assets, creating bubbles in real estate and stock markets. Household debt surges.

Effective Investment Strategies to Protect Yourself During Inflation

1. Invest in Floating Rate Bonds###

Traditional bonds offer fixed interest. When inflation is high, interest rates fall, and bond prices decline. Floating rate bonds adjust interest payments according to reference rates, providing better returns.

( 2. Gold - Classic Inflation Hedge Asset

Gold prices tend to rise with inflation. When inflation is high, investors often buy gold as a safe haven. Trading CFDs on gold is a way to profit from price movements, both upward and downward.

) 3. Bank Stocks

When central banks raise interest rates, commercial banks benefit from higher net interest margins ###Net Interest Margin###, increasing profits and stock prices.

( 4. Energy Stocks

Companies involved in oil and gas benefit directly from high commodity prices. During inflation, oil prices generally surge.

) 5. Real Estate

Rents increase with inflation, boosting rental income. Real estate can also appreciate in capital ###capital appreciation###, making it a good investment if funds are available.

( 6. Food Stocks

Food is a necessity, and food companies can adjust prices when costs rise. This allows them to pass on costs to consumers, making food stocks relatively resilient to inflation.

) 7. High-Yield Savings Accounts

Banks offering high-interest savings accounts, especially for 12 months or more, provide better returns than regular deposits.

How Is Inflation Measured

Every month, the Ministry of Commerce collects prices of 430 items to calculate the Consumer Price Index ###CPI###. The increase in CPI compared to the previous year is the inflation rate used by the Bank of Thailand as an indicator.

Latest data (January 2024): Consumer Price Index 110.3, up 0.3% year-over-year (Base 2019 = 100). The overall YoY inflation rate decreased to 1.11%, the lowest in 35 months, due to falling energy prices from government support measures and increased fresh food prices.

Summary: Adjusting to Inflation Requires Balance

Inflation at normal levels (2-3% per year) is considered healthy for the economy, supporting business growth, productivity, and employment. However, hyperinflation (Hyper Inflation) is disastrous. If you understand the end goals, manage your money wisely, and choose investments carefully, you can not only protect yourself from inflation but also profit from it.

Stay informed about market news, as inflation conditions change with geopolitical situations, global events, and central bank policies. Being prepared in advance is the key to financial success across different economic cycles.