What should you do if the product price skyrockets? Understanding the economic conditions during periods of rising prices

This article will help investors gain a deep understanding of why soaring prices impact our wallets and what strategies are necessary to protect wealth throughout this challenging economic environment.

Expensive Prices, Stay Calm, Because That’s Inflation

In economics, inflation refers to a situation where the intrinsic value of money tends to weaken. This issue manifests clearly in the form of steadily rising prices for goods and services we purchase daily.

For a simple example, think of your friend Jekkan, who ten years ago, with 50 baht, could buy many plates of rice. But today, with the same salary, he can only buy one plate. The problem isn’t that 50 baht has become less valuable, but that the price of rice has increased 5-10 times. This is the basic meaning of inflation, which is a key factor that investors must monitor closely because it directly affects decision-making in the stock market.

Who will get richer? Who will be at a disadvantage?

In the context of rising prices, the groups that have an advantage are small entrepreneurs, vendors, and those with adaptable incomes because they can adjust their prices in response to the situation promptly.

Conversely, workers or those on fixed salaries are often squeezed as interest rates on deposits decrease while inflation rises, reducing their purchasing power significantly.

Three Causes of Price Problems

1. Demand exceeds supply (Demand Pull Inflation)

When consumers want to buy more goods and services but supply is limited, sellers have enough power to raise prices.

2. Rising production costs (Cost Push Inflation)

Higher prices for raw materials, energy, labor, and transportation force producers to pass these costs onto consumers through price increases.

3. Printing more money (Printing Money Inflation)

When the government or central bank increases the money supply beyond necessity, it results in money losing its value.

Global Situation: Why Is Inflation Spreading?

During the recovery from COVID, the world experienced “revenge spending,” where individuals eagerly spent after months of staying home. This caused demand for goods to explode, while supply remained constrained due to supply chain issues.

Additionally, energy prices, especially crude oil and natural gas, surged due to high demand and production limits from exporting countries, along with shortages of semiconductor chips and shipping containers. All these factors increased global production costs.

According to data from the International Monetary Fund (IMF), in January 2024, the global economy is expected to grow at a moderate rate of 3.1% in 2024 and 3.2% in 2025. However, this growth remains below the historical average due to tight monetary policies, reduced fiscal support, and low productivity growth.

Price Bubble and the Unwanted Stagflation

Currently, some signals indicate that the economy is entering a difficult phase called Stagflation (High prices but stagnant economy)

If the public’s purchasing power declines, businesses will struggle to sell, leading entrepreneurs to lower prices, cut investments, or lay off employees. These effects not only impact GDP growth but also create an abnormal economic cycle.

Following this context, the cost of living for people continues to rise sharply, further reducing their purchasing power.

Market Prices: See, Do They Make Sense or Not?

Below is a comparison of everyday item prices over four years:

Prices of meat, energy, and vegetables fluctuate greatly depending on the global market, directly impacting household budgets.

Beware of Deflation, Adapt Differently

Contrary to inflation, deflation is a situation where prices of goods and services decrease continuously. This occurs due to weak demand or insufficient money circulation.

Producers then hesitate to produce more, stop investing, and reduce employment, causing the economy to enter a negative cycle. No one wants this situation.

Both conditions, if severe and prolonged, are enemies of a balanced, comfortable economy where people can live with dignity.

How Central Banks Observe and Measure Price Issues

Every month, the main agencies collect data on 430 items of goods and services to calculate the Consumer Price Index (CPI). Through this indicator, the central bank (Bank of Thailand) can formulate appropriate monetary policies.

Latest data from January 2024 shows the CPI at 110.3, up 0.3% compared to January 2023. The year-on-year inflation rate (Year-on-Year) has decreased to 1.11%, the lowest in 35 months, mainly due to falling energy prices, fresh vegetables, and meat.

Real-Life Effects of Inflation

For the general public

Living costs, salary pressures, and savings opportunities all decline. Consumers tend to buy only essential goods, avoiding luxury items.

For entrepreneurs

The problem is twofold: higher prices may reduce sales, and increased production costs cause some to delay production or lay off staff.

For the country

People spend less, businesses reduce investments, and long-term capacity development slows down. If real interest rates stay negative for a long time, people tend to return to risky assets, leading to a general bubble.

How to Adapt and Survive When Inflation Comes

Assess Spending Structure

First, identify which expenses are necessary and which can be cut. Some may need to adjust their lifestyle standards.

Choose Smart Saving Strategies

Deposits often have low interest rates below inflation, so keeping cash traditionally isn’t the best method.

Explore Investment Strategies

Invest in stocks, mutual funds, gold, or bonds with interest rates linked to inflation (Floating Rate Bonds or Inflation-Linked Bonds).

Avoid Bad Debts

Don’t take on debt that exceeds your income. When inflation is high, the benefits of borrowing increase without real gains.

Follow Economic News

Geopolitical factors, central bank policies, and supply volatility are all indicators to monitor, so you can adapt promptly.

Asset Classes Benefiting from Rising Prices

###Bank Stocks

Banks’ main income comes from the interest rate spread between borrowing and lending. When interest rates rise, net profit increases.

###Insurance Stocks

Insurance companies hold low-risk assets like government bonds. When interest rates increase, bond yields also rise.

###Real Estate Funds

Rents increase with inflation, making real estate investments relatively stable.

###Gold

Gold is a global financial reserve. Its price moves in the same direction as inflation. Trading CFDs on gold offers profit opportunities on both sides.

###Food Stocks

Essential goods companies have high pricing power and benefit directly from rising prices.

Real Case Example: PTT’s Profit from Inflation

When oil prices surged, energy companies like PTT benefited from distorted prices. In the first half of 2022, the company and its subsidiaries earned 1,685,419 million THB, with a net profit of 64,419 million THB, a 12.7% year-on-year growth.

This is a bright example of how some business sectors can leverage economic challenges.

Pros and Cons of Price Problems

( Pros ✅

Investments become more active, boosting the economy. Employment increases, money circulates more, and unemployment decreases.

) Cons ❌

Prices rise rapidly, purchasing power declines, consumers cut spending, businesses struggle to sell, layoffs occur, and the economy contracts, creating a negative cycle.

Summary: Beware of Inflation, Stay Calm

Inflation is a natural part of the economic cycle. When demand is high, prices increase, and the economy grows.

However, if it becomes too severe, leading to “Hyperinflation,” it turns into an undesirable state.

Investors who understand this well can find opportunities by investing in assets that benefit from rising prices, such as bank stocks, insurance stocks, or gold.

No matter what storm of prices comes, staying informed and having good financial planning are your shields to protect your resources from being drained by volatile economies.