Changes in Price Levels: Understanding Inflation and Deflation

How Does Inflation Affect Your Daily Life?

Suppose today you have 50 baht. You can buy several plates of rice. But over time, the price of rice increases so much that the same 50 baht can only buy one plate. This phenomenon is called inflation(Inflation), which is an economic event where the prices of goods and services tend to rise continuously. It results from a decrease in the value of money, leading to a decline in purchasing power.

This issue is not only a problem for the wealthy, ordinary individuals, entrepreneurs, and even governments face the same challenges. Inflation is a key factor in monetary policy decisions and significantly influences the stock market.

What Causes Prices to Keep Rising?

The occurrence of inflation mainly stems from three factors:

1. Increased demand for goods, but insufficient supply (Demand Pull Inflation)

When the economy recovers after a recession, consumers start to save and become willing to spend. This desire for satisfaction (revenge spending) occurs everywhere, but producers cannot respond to the high demand immediately because production takes time. As a result, prices surge.

2. Rising production costs (Cost Push Inflation)

Raw material costs in the global market have increased significantly, whether natural gas, crude oil, steel, or copper. During the pandemic, production was disrupted, and major exporting countries limited their output. For example, crude oil prices, which were at their lowest in 2020, surged again after countries reopened.

Supply chain disruptions (supply chain disruption) remain a major factor, such as shortages of containers and semiconductor chips, which greatly increase transportation and manufacturing costs of electronics, especially in the era of work from home.

3. Excessive money printing (Printing Money Inflation)

When the government prints a large amount of money, the total money supply in the economy increases, causing inflation to intensify.

Current Global Economy: Warning Signs

Many signals indicate that the world is heading toward stagflation, a combination of high inflation, sluggish economic growth, and rising unemployment—an undesirable scenario.

According to the IMF report in January 2024, the global economy is expected to grow about 3.1% in 2024 and 3.2% in 2025. Although slightly higher than previous forecasts, it remains below the historical average due to tight monetary policies, reduced financial support, and still-low productivity growth.

For Thailand, it has not yet entered true stagflation, but the economic situation is not entirely good either. Continuous monitoring of news is necessary.

Measuring Inflation: Consumer Price Index (CPI)

Every month, Thailand’s Ministry of Commerce collects price data from 430 goods and services and calculates the Consumer Price Index (Consumer Price Index: CPI). An increase in CPI compared to the previous year is the inflation rate that the Bank of Thailand uses as its target.

For example: In January 2024, the consumer price index was 110.3 (Base year 2019 = 100), which increased by 0.3% from January 2023. This means that the general price level of goods has risen.

Year-on-Year inflation rate in January 2024 was 1.11%, down from the previous year. This is the fourth consecutive month of decline and the lowest in 35 months, due to falling energy prices and the decrease in fresh food prices such as vegetables and meats, following increased harvests.

Who Benefits and Who Loses from Inflation?

Beneficiaries:

• Entrepreneurs and traders (can raise prices)
• Shareholders and bondholders
• People with income that can adjust with market conditions
• Banks and lenders (when interest rates rise)

Those at a disadvantage:

• Employees with fixed salaries (wage increases less than inflation)
• Lenders (when they receive money worth less)
• People holding cash

Thailand’s Inflation History

Looking back, Thailand experienced a peak inflation of 24.3% in 1974 due to the Middle East conflict, which caused oil prices to soar. The next was in 1980 during the Iran-Iraq war.

After the 1997 economic crisis, the baht depreciated, and inflation peaked at 7.89% in 1998. The government then implemented policies to keep inflation below 5% for a long period.

However, about 25 years ago, in 2008, inflation exceeded 5.51% at times, but was brought under control again. Until May 2022, inflation spiked again to 7.10% due to the Russia-Ukraine war.

Changes in Food and Fuel Prices on the Kitchen Table

Looking at food and fuel prices from 2021 to 2024:

It’s clear that inflation has made essential goods significantly more expensive.

Profit Example: PTT Case

PTT Public Company Limited is a good example of benefiting from rising oil prices. In the first half of 2022, the company and its affiliates earned a total revenue of 1,685,419 million THB and a net profit of 64,419 million THB, growing 12.7% compared to the previous year.

Most of the profit came from PTT’s own operations, accounting for 24%, with the rest from subsidiaries. This is a countertrend, making huge profits during inflation.

Pros and Cons of Inflation

Advantages:

• Businesses can expand when they can raise prices
• Employment rate increases with business growth
• Money circulation in the economy strengthens
• Unemployment decreases

Disadvantages:

• Excessive inflation reduces consumers’ purchasing, leading to lower sales
• Entrepreneurs may cut investments and lay off employees
• Purchasing power of cash declines
• Business systems lack stability; individuals may invest in high-risk assets, creating bubbles

Inflation and Deflation: Opposite Phenomena

Deflation is the opposite, occurring when prices of goods and services decrease continuously. It results from reduced demand or insufficient money supply.

Effects of Inflation on Life and Economy

On People:

• Cost of living rises, purchasing power declines
• Income is insufficient for expenses

On Entrepreneurs:

• Goods become expensive, sales decline
• Production costs increase
• Unemployment may rise

On the Country:

• Slowed capacity for production development
• If inflation is high enough to make real interest rates negative, people may speculate, creating asset bubbles

How to Adapt When Inflation Arrives

1. Investment Planning

Instead of depositing money with low interest, invest in high-yield assets like stocks, mutual funds, real estate.

2. Control Debt

Avoid unnecessary borrowing; plan spending carefully.

3. Invest in Stable Assets

Gold, real estate—assets that do not depreciate over time.

4. Stay Informed

Inflation affects all aspects of life; always keep updated.

Investment Options During Inflation

High-interest savings accounts Time deposits with high interest rates require locking in for (12, 24, 36 months).

Real estate funds Rental income adjusts with inflation, not volatile like stocks. A long-term, stable investment.

Floating Rate or Inflation-Linked Bonds Choose bonds that adjust interest rates according to inflation. Study the issuer’s credibility.

Gold Price moves in the same direction as inflation. Suitable for long-term investment or CFD trading for both bullish and bearish speculation.

Stocks Benefiting from Inflation:

• Bank stocks: Profit from higher net interest margins when interest rates rise
• Insurance stocks: Invest in government bonds and low-risk assets; returns adjust with inflation
• Food stocks: Essential goods with pricing power

Understand Fully

Inflation is not an enemy to be avoided at all costs but an economic phenomenon to understand and coexist with.

Moderate inflation helps economic growth, but when it becomes too high (Hyper Inflation), it turns into hyperinflation and damages the economic system.

The key is planning and preparation, adapting to changing conditions, and using knowledge as a tool to build financial stability. Smart investors diversify risks, stay informed regularly, and generate profits even during overwhelming inflation.