Causes and Effects of Inflation: How Many Things Do Investors Need to Know

Why Do Prices Keep Rising?

In the case of Mr. A running to the market this morning, eggs that used to cost 4.45 baht per piece are now 3.9 baht per piece. It seems to have decreased, but pork prices have increased from 137.5 baht/kg to 205 baht/kg, then dropped to 133.31 baht/kg. Liquefied petroleum gas nearly tripled from 318 baht per tank to 423 baht per tank. These are signs of inflation - an economic condition where the prices of goods and services increase continuously.

From a financial perspective, inflation means your money is worth less. The ability to buy the same goods requires more money. At first glance, it may seem negative, but the situation is more complex. Some benefit, while others lose.

Who Benefits and Who Loses from Inflation?

Beneficiaries include: Traders, entrepreneurs, shareholders of food and energy companies, bankers, and debtors - they can raise prices and increase interest rates for debtors.

Those at a disadvantage include: Salaried employees, creditors, bank depositors - wages increase but not as fast as inflation, causing the value of bank deposits to diminish.

A clear example is PTT, which reported a net profit of 64,419 million baht in the first half of the year, a 12.7% increase due to soaring oil prices from the Russia-Ukraine war.

What Causes Inflation? 3 Major Causes

1. Demand exceeds supply (Demand Pull Inflation)
Consumers want to buy more, but factories can’t keep up. Sellers raise prices, similar to major markets. After the global economy recovers from COVID, everyone wants to buy, container shortages occur, leading to “revenge spending.”

2. Rising production costs (Cost Push Inflation)
Global prices for crude oil, natural gas, steel, and copper increase. Factories need more money, and ultimately, they raise prices for consumers.

3. Government printing more money (Printing Money Inflation)
Excessive money circulation causes the value of money to decline.

For Thailand’s current inflation, it results from combined factors: global economic recovery, strong US expansion, monetary support measures, supply shortages, and geopolitical tensions.

According to IMF data up to January 2024, the global economy is expected to grow by 3.1% in 2024 and 3.2% in 2025, with inflation rates decreasing faster than expected.

Why Should You Worry? Inflation’s Impact on You and Me

If you’re a salaried worker:
Living costs rise—higher bills for electricity, water, food, transportation. Wages increase but less than inflation, reducing purchasing power and limiting spending.

If you’re an entrepreneur:
Prices of goods rise, sales may decline, production costs increase, profits are squeezed. Some may cut investments or reduce staff.

If you’re a country:
Citizens buy less, businesses don’t expand, GDP growth slows. Prolonged low interest rates may encourage risky investments, leading to bubbles.

Inflation vs. Deflation: What’s the Difference?

Inflation = Rising prices, economic expansion

Deflation = Falling prices, low demand, insufficient money supply, producers reluctant to produce, economic slowdown

Thailand’s CPI in January 2024 was 110.3, up 0.3% from January 2023 (Base Year 2562 = 100), down 1.11% year-over-year, the lowest in 35 months, due to falling energy prices and increased supply of fresh vegetables and meats.

Month-to-month (MoM), prices increased by 0.02%, driven by higher fuel, electricity, and fare prices, while food prices decreased by 0.31% due to increased supply of rice, eggs, and vegetables.

How to Plan Finances During Inflation: What Should You Do?

( How to Invest When Inflation Comes?

High-interest savings accounts - Choose fixed deposit accounts with higher interest rates, but must lock in for the term.

Real estate - Rental income adjusts with inflation, less volatile than stocks. If you have capital, investing in property is a good option.

Bonds - Opt for Floating Rate Bonds or Inflation-Linked Bonds that adjust interest based on inflation each period. Study the issuer’s credibility carefully.

Gold - Gold prices move in line with inflation; high inflation makes gold expensive. Suitable for long-term speculation. Traders often use CFDs on gold to profit from both rising and falling prices.

Stocks benefiting from inflation:

• Bank stocks - Profit from interest rate spreads; when rates rise, bank profits increase, leading to higher returns.
• Insurance stocks - Invest in low-risk assets; returns follow government bonds aligned with inflation.
• Food stocks - Essential goods, consumers must buy, and companies have pricing power.

Avoid these:

• Bad debt - Avoid borrowing without income; think carefully before purchasing unnecessary items.
• Holding cash without investing - Money sitting idle loses value due to inflation.

) Things to Do to Prepare

1. Follow news closely - Inflation affects everyone’s finances. Stay informed and prepare for changes.

2. Plan your investments - Invest in assets with higher returns, such as stocks, mutual funds, or real estate.

3. Choose stable assets - Gold retains intrinsic value and doesn’t depreciate over time.

4. Budget carefully - Plan expenses more strictly, cut unnecessary spending.

The Contrasting Issue: Deflation

Deflation occurs when prices of goods and services decrease continuously. Demand drops, money supply is insufficient, producers reduce output, and the economy stagnates.

If Thailand enters a Stagflation ###High Inflation + Economic slowdown###, it combines hyperinflation (Hyper Inflation) with high unemployment, leading to decreased consumption, business failures, layoffs, and slower GDP growth, worsening economic conditions.

Advantages and disadvantages of inflation:

Advantages ✅

• Business owners can sell at higher prices, expand operations, create more jobs, and increase income.
• Economic growth encourages investment and employment.

Disadvantages ❌

• Rapid inflation makes goods expensive, reduces consumer purchasing, lowers sales, decreases income, cuts jobs, and shrinks production.
• Hyperinflation causes instability and loss of confidence.
• Reduced purchasing power diminishes savings’ value.

Summary: Causes and Investment Strategies for Inflation

Inflation occurs when demand exceeds supply, raising prices. The CPI is a key indicator; governments monitor inflation to set economic policies and interest rates.

Moderate inflation benefits the economy—growth, employment, and investment increase—differing from deflation.

However, excessive inflation (Hyper Inflation) becomes harmful—goods become unaffordable, economic slowdown, and unemployment rise.

Investors can profit by investing in sectors that benefit from inflation, such as bank stocks, insurance, food, or assets like gold, real estate, and bonds.

Key point: Always follow economic news, plan investments wisely, invest in stable assets, and manage expenses carefully to minimize inflation’s impact on your livelihood.