The phenomenon of inflation in today's economy: what should investors know?

In recent years, inflation has become a lively topic of discussion in the financial markets. This is due to the economic recovery after the pandemic crisis, the pent-up demand for products, and global supply chain constraints—all of which have contributed to continuous price increases. This situation presents challenges for the public, entrepreneurs, and investors. This article will help us understand more about the nature of inflation and how to adapt appropriately.

What exactly is (Inflation)

Inflation refers to an economic condition where the price levels of goods and services increase steadily. This means that the real value of money is decreasing. When we buy the same item, we need to pay more than last year.

For example, suppose Mr. A has 50 baht, which can buy several bowls of rice. But over time, rice prices increase, and now 50 baht can only buy one bowl. That is an example of inflation.

###Who benefits and who loses from inflation?

Beneficiaries include business owners, traders, and those with flexible income, as they can adjust their selling prices according to market conditions. Meanwhile, salaried employees, even if they receive a salary increase, often see their raises lag behind inflation, resulting in a loss of purchasing power.

Factors Driving Inflation

###Common causes

Inflation mainly results from three primary causes:

1. Demand-pull inflation (Demand Pull Inflation)
When consumers want to buy more goods and services but producers cannot supply enough, sellers gain pricing power.

2. Cost-push inflation (Cost Push Inflation)
When raw material prices, wages, or energy costs rise, producers increase prices to maintain profit margins.

3. Excess money supply (Printing Money Inflation)
When governments or central banks rapidly increase the money supply, it can lead to severe inflation.

###Current causes of inflation

The current situation is more complex, driven by multiple factors:

• Post-pandemic economic recovery: Many countries are trying to recover despite various challenges.

• Rising demand for fuel and raw materials: As countries reopen their economies, crude oil, natural gas, steel, copper, etc., prices soar from their lows in 2020.

• Supply chain disruptions (Supply Chain Disruption): Container shortages, semiconductor shortages, and other issues have significantly increased transportation and production costs.

• Overly strong economic growth: The US and many emerging markets have experienced higher-than-expected growth rates.

According to IMF data in January 2024, the global economy is projected to grow by 3.1% in 2024 and 3.2% in 2025. Although slightly above expectations, these figures remain below historical averages due to tight monetary policies and reduced financial support.

How is inflation measured?

Thailand uses the Consumer Price Index (CPI) (Consumer Price Index: CPI) collected monthly by the Ministry of Commerce, tracking prices of 430 goods and services.

For example, in January 2024, the CPI was at 110.3 (base 2019=100), an increase of 0.3% compared to the same period last year. The annual inflation rate (year-over-year) decreased to 1.11%, the lowest in 35 months.

This decline is mainly due to falling energy prices following government measures, as well as decreases in fresh vegetables and meat prices due to increased production.

How does inflation differ from deflation?

Deflation (Deflation) is the opposite phenomenon of inflation. It is an economic condition where the price levels of goods and services decrease continuously.

Deflation occurs when:

• Demand for goods contracts
• The money supply in the economy is insufficient
• Producers reduce output

Both high and prolonged inflation and deflation are dangerous for the economy. Moderate inflation, however, is beneficial for economic growth, whereas deflation often indicates declining confidence among consumers and businesses.

How does inflation affect daily life?

( Rising cost of living

Inflation causes essential daily goods—such as meat, vegetables, oil, eggs—to increase in price continuously. For example, in 2021, red pork was priced at 137.5 baht/kg, but in 2022, it surged to 205 baht/kg. Garden chili went from 45 baht/kg in 2021 to 185 baht/kg in 2022.

The rising cost of living impacts consumers’ purchasing power.

) Effects on entrepreneurs and the labor market

As prices rise, demand decreases, and productivity may decline. Companies might consider reducing their workforce, leading to higher unemployment.

In some cases, such as PTT Public Company Limited, when oil prices surged in the first half of 2022, the company earned 1,685,419 million baht and net profit of 64,419 million baht, a 12.7% increase year-over-year. This shows that some businesses can profit from inflation.

Effects on macroeconomic levels

If inflation becomes severe, it can lead to stagflation, a mix of high inflation and economic stagnation. This situation results in:

• Reduced purchasing power
• Lower sales for businesses
• Slowed investment and expansion
• Rising unemployment
• Decreased GDP growth

Stagflation is an undesirable scenario for any economy. Thailand’s economy has not yet entered this state but requires close monitoring.

Pros and cons of inflation

(Advantages✅

• Economic expansion: Business owners can sell goods at higher prices, encouraging investment and employment.

• Lower unemployment: Increased demand for products leads to more hiring.

• Value of debt: Borrowers benefit because they can repay debts with less valuable money.

)Disadvantages❌

• Hyperinflation ###Hyper Inflation(: Rapid inflation causes prices to skyrocket, reducing consumer purchasing, decreasing sales, slowing production, and increasing layoffs.

• Reduced purchasing power: Rising living costs mean that if our money does not generate returns, its value diminishes over time.

• Financial system instability: Prolonged high inflation may lead people to invest in high-risk assets, creating asset bubbles.

How to cope with inflation

)Financial adaptation

1. Develop appropriate investment plans: During inflation, low-interest savings are less effective. Invest in assets with higher returns, such as stocks, mutual funds, or real estate.

2. Avoid unnecessary debt: Plan expenses carefully; buy only essential goods.

3. Choose stable assets: Gold, floating rate bonds, or inflation-linked bonds that adjust interest rates according to inflation.

4. Follow economic news: Pay attention to central bank policies, interest rate changes, and inflation trends.

###Investment options during inflation

Bank stocks: Benefit from rising interest rates, as their profit margins increase.

Insurance stocks: Gain from higher yields on bonds and other fixed-income investments.

Gold: Moves in tandem with inflation, serving as a safe long-term asset.

Real estate funds: Rental income adjusts with inflation, providing stability not tied to stock market fluctuations.

Bonds: Prefer floating rate bonds that adjust interest rates based on market changes.

Summary

Inflation means a continuous increase in the prices of goods and services, driven by rising demand, higher production costs, or an excess money supply.

Moderate inflation can be beneficial for economic growth. However, hyperinflation causes hardship for the public and the economy. It differs from deflation, which involves falling prices and signals economic problems.

Investors and the general public should monitor economic data, understand the nature of inflation, and adjust their financial strategies accordingly to seize opportunities effectively during such conditions.