What is inflation? Why does inflation occur, and how should you prepare?

The Meaning of Inflation and Its Impact on Trading

Inflation is an economic condition where the prices of goods and services increase over time. In another perspective, it means the value of money is decreasing, causing the same amount of money to buy fewer items. For example, if Mr. A has 50 baht, he can buy 5 plates of rice, but now that money only buys 2 plates because rice prices have increased. This is the true state of inflation.

Inflation affects not only the goods themselves but also investors’ decision-making, as they monitor price changes. When the inflation rate rises or falls, the stock market responds accordingly.

Who benefits from inflation?

Entrepreneurs, traders, and those with flexible income can raise their prices in line with changes, unlike salaried employees who typically see smaller increases than the rise in prices. Even if salaries increase, they often do so at a rate lower than actual inflation.

Causes of Inflation and Their Origins

Three common causes

1. High demand, insufficient supply (Demand Pull Inflation)
When consumers want to buy more but goods are scarce, sellers raise prices.

2. Rising production costs (Cost Push Inflation)
Manufacturers face higher expenses from raw materials to wages, prompting them to increase product prices.

3. Government printing more money (Printing Money Inflation)
Excess money in the economy compared to goods leads to severe inflation.

Current global events leading to causes of inflation

After the COVID-19 pandemic, the global economy recovered rapidly, with consumers returning to buy goods aggressively (Revenge Spending). However, factories could not meet demand, compounded by shortages of containers and semiconductor chips. Production costs worldwide increased significantly due to natural gas, crude oil, steel, and copper prices.

For example, crude oil prices shifted from “record lows” in 2020 during strict lockdowns to “record highs” as countries reopened.

According to IMF data from January 2024, the global economy is expected to grow by 3.1% in 2024 and 3.2% in 2025. However, growth remains below historical averages due to tight monetary policies and reduced financial support.

How Does Inflation Affect Citizens and Countries?

Impact on the general public

Rising living costs reduce purchasing power. People can buy fewer goods and services. Even with salary increases, they often do not keep pace with rising costs.

Impact on entrepreneurs

As prices rise, sales decline, and production costs soar. Many businesses delay hiring or even lay off employees.

Impact on national economies

When purchasing volume drops, new investments slow down. The country’s production capacity stagnates. If inflation is high enough to push real interest rates into negative territory, people may speculate in risky assets, creating bubbles and financial system imbalances.

Changes in daily product prices

Data from 2021-2024 shows:

• Red pork: increased from 137.5 to 133.31 baht/kg.
• Chicken breast: remains at 80-105 baht/kg.
• Eggs: increased from 4.45 to 3.9-4 baht/egg.
• Chili peppers: fluctuated from 45-250 baht/kg.
• Diesel oil: increased from 28.29 to 40.24 baht/liter.

How to Measure and Track Inflation Rate

Every month, the Ministry of Commerce collects prices of 430 items to calculate the Consumer Price Index (CPI). The CPI increase compared to the previous year indicates the inflation rate used by the Bank of Thailand as a target.

CPI data from January 2024 shows a level of 110.3, up 0.3% from the same month last year (Base 2019 = 100), and the overall inflation rate (YoY) is 1.11%. This has decreased for four consecutive months, reaching the lowest in 35 months, mainly due to falling energy and fresh food prices.

Inflation vs. Deflation: What Are the Differences?

Deflation is the opposite of inflation — prices of goods and services decrease continuously. It results from reduced demand or insufficient money circulation, leading producers to cut back on production and the economy to stagnate.

Both severe inflation and deflation harm economic growth and citizens’ quality of life.

Stagflation and the Current Economic Situation

Looking at current conditions, many signs indicate the world is entering Stagflation — a combination of high inflation and slow growth. Reports suggest that employment recovery is incomplete.

If Thailand enters this state, the value of money will decline, consumers will spend less, businesses will struggle to sell, leading to price cuts, lower profits, reduced expansion, layoffs, and closures. This results in slower GDP growth, a scenario nobody wants.

While Thailand’s economy has not fully entered stagflation, it does not mean the economy is healthy. Continuous monitoring of news is essential.

How to Manage Inflation: Financial Planning Tips

Investment Planning

When deposit interest rates are low, consider investing in assets with higher returns, such as stocks, mutual funds, or real estate.

Avoid Bad Debt

Be cautious with borrowing that does not generate income. Have strict spending plans and avoid unnecessary purchases.

Choose Stable Assets

Gold is a good option because it has intrinsic value and does not depreciate.

Follow News

Inflation impacts everyone’s finances and life. Stay informed to prepare for changing situations.

Best Investment Options During Inflation

High-Interest Savings Accounts

Choose fixed deposit accounts with high interest rates from banks, with terms of 12 or 36 months, to earn better interest than regular savings.

Real Estate Funds

Since rental income tends to follow inflation, these are less affected by stock market volatility. They offer returns from dividends and capital appreciation, but detailed research is recommended.

Floating Rate Bonds or Inflation-Linked Bonds

Select Floating Rate Bonds or Inflation-Linked Bonds that adjust interest rates according to inflation changes. Prioritize bonds with high creditworthiness.

Gold

Gold moves in tandem with inflation. It is a stable asset and offers long-term speculative opportunities. CFD trading on gold allows for “speculation both up and down” without physical purchase.

Stocks Benefiting from Inflation

When inflation occurs, the following sectors tend to perform well:

Bank stocks: Banks earn mainly from interest on loans. When interest rates rise, net interest margins and profits increase.

Insurance stocks: Insurance companies invest premiums in bonds. When inflation and interest rates rise, investment returns also increase.

Food stocks: As demand for food remains steady, companies in this sector can adjust prices and have bargaining power.

A clear example is PTT Public Company Limited (Public), which in the first half of 2022 reported revenue of 1,685,419 million baht and net profit of 64,419 million baht, growing 12.7% compared to the same period last year due to rising oil prices driven by inflation.

Summary: Inflation and How to Respond

Inflation results from rising demand and increasing prices. Moderate inflation is beneficial for the economy as it boosts employment and growth. However, if it becomes too high (Hyper Inflation), it can turn into deflation in the end.

Investors can profit by investing in sectors benefiting from inflation, such as banking, insurance, or energy, or by choosing other assets like gold, inflation-adjusted bonds, and real estate.

Most importantly, stay constantly updated on economic news to avoid missing key events that shape the economy and impact your personal finances.