What exactly is inflation, and why should investors be concerned?

If you notice that the prices of everyday purchases are continuously rising, that is a sign of inflation — an economic phenomenon that affects our purchasing power. But it’s not easy to truly understand.

Inflation: The Reality We Face

Inflation is an economic situation where the value of money decreases, resulting in prices for goods and services rising steadily. In other words, the money in our pockets buys less than before.

For example, at one point, 50 baht could buy many bowls of rice, but today, the same amount of money can only buy one bowl. That’s the power of inflation.

Who benefits and who loses?

Entrepreneurs and merchants benefit because they can adjust their prices according to inflation. However, salary workers often do not get their wages adjusted in line with inflation, which reduces their purchasing power.

Types of Causes of Inflation

Generally, inflation arises from three main causes:

1. Demand Pull Inflation (Demand-driven inflation)
Consumers want to buy more goods and services, but currently, the market lacks supply, so sellers raise prices.

2. Cost Push Inflation (Cost-driven inflation)
Production costs increase, whether due to energy prices, raw materials, or wages, prompting producers to raise their prices.

3. Printing Money Inflation (Money printing inflation)
The government prints excessive amounts of money, leading to an oversupply in the economy.

Thailand’s inflation history

In 1974, Thailand’s inflation exceeded 24.3% due to the Middle East oil crisis.

In 1980, inflation rose again due to the Iran-Iraq war.

In 1998, after the Asian economic crisis, the baht depreciated, and inflation hit 7.89%.

By 2022, inflation jumped to 7.10% again, due to the Russia-Ukraine war.

How is inflation measured?

Consumer Price Index (CPI) is a key tool for measuring inflation. Every month, Thailand’s Ministry of Commerce collects data on the prices of 430 items to calculate the CPI.

Data from January 2024:

• CPI stands at 110.3 (Base year 2019 = 100)
• Overall inflation (YoY) decreased by 1.11% compared to the previous year
• This is the lowest in 35 months.

Why does inflation occur in today’s world?

After the pandemic crisis, the global economy faces “revenge spending” — pent-up consumer demand exploding, but production capacity not yet catching up. Additionally:

• Energy prices surged dramatically, with crude oil jumping from record lows in 2020 to record highs.
• Supply chain issues such as shortages of shipping containers and semiconductor chips.
• Monetary policies where central banks maintain low interest rates to stimulate the economy.

According to IMF data as of January 2024, the global economy is expected to grow by 3.1% in 2024 and 3.2% in 2025, but still below historical averages.

How does inflation affect our daily lives?

On the general public’s court

Higher living costs mean:

• Less can be bought for the same amount
• Reduced purchasing power
• More careful financial planning

Here are some key daily items’ prices over recent years:

On the entrepreneurs’ court

When prices rise, sales decrease, and costs increase. Some businesses have to delay investments and reduce staff, which is a sign of Stagflation — a situation nobody wants.

On the national economy’s court

If Stagflation occurs:

• People buy less
• Businesses cannot sell effectively
• Investment in production development slows down
• Unemployment rises
• GDP growth slows

Inflation vs. Deflation: What’s the difference?

Both situations are dangerous if severe and prolonged.

What should investors do when inflation occurs?

1. Make smart investment plans

In an inflationary era, deposit interest rates are very low, so seek returns elsewhere:

• Stocks: opportunities if choosing the right sectors
• Mutual funds: diversification options
• Real estate: rental income often adjusts with inflation

2. Reduce unnecessary debt

• Avoid unnecessary purchases
• Plan expenses strictly
• Do not borrow for income-generating purposes

3. Choose stable assets

Gold is considered a good option because:

• It has intrinsic value
• Its price moves in line with inflation
• It’s a safe asset

Some investors prefer trading CFD on gold, as it allows speculation on both rising and falling prices.

4. Keep up with news

Inflation and related policies change constantly. Staying updated is essential for investors.

Which stocks benefit from inflation?

Bank stocks

Banks profit from the interest margin (Net Interest Margin). When interest rates rise to combat inflation, banks earn more.

Insurance stocks

Insurance companies invest in bonds whose returns correlate with inflation. Also, companies like PTT Public Company Limited (which benefited greatly in the first half of 2022) — PTT had revenue of 1,685,419 million Baht and net profit of 64,419 million Baht, growing 12.7% year-over-year due to soaring oil prices.

Food stocks

Global food issues make food producers essential and able to adjust prices.

Floating rate bonds

Floating Rate Bonds or Inflation-Linked Bonds adjust interest rates according to inflation changes.

What you will learn during inflation

Moderate inflation is a natural part of economic cycles, but hyperinflation (Hyper Inflation) is where problems arise.

Understanding inflation is crucial for investors to make wise decisions. Compared to deflation (the opposite situation), inflation often signals economic growth, but it must be managed properly.

By monitoring global mechanisms, central bank policies, and making prudent investments, you can build financial stability even in challenging inflationary times.