What is inflation? What are the real causes? And how to cope without incurring losses

In the current financial market, inflation is a term that investors must understand deeply because it directly impacts our investment decisions. This article will dissect the cycle of inflation, its differences from deflation, and investment strategies to ensure profits are preserved.

What is Inflation in essence?

Inflation (Inflation) simply means “rising prices of goods,” but it’s important to understand it more deeply.

From an economic perspective, inflation occurs when:

• The price level of goods and services tends to rise continuously
• Or in other words, “the value of our money is decreasing”

For example, in the past, 50 baht could buy many bowls of rice, but today, the same 50 baht can only buy one bowl. That is inflation.

Imagine many years ahead, rice prices will keep rising until it costs 100 baht per bowl. Such changes have a compelling effect that investors need to consider.

Why does inflation occur? There are 3 main causes

1. Demand Pull Inflation - Increased demand but insufficient supply

When consumers want to buy more goods, but the market cannot supply enough, sellers tend to raise prices. Post-COVID-19 data shows that people have more savings because they stayed home longer. When the country reopens, “revenge spending” occurs — reckless buying to compensate for lost time.

2. Cost Push Inflation - Rising production costs

Manufacturers bear higher costs, such as:

• Oil, natural gas, coal, copper, all reaching record highs
• Supply chain disruptions (Supply Chain) due to the pandemic — shortage of shipping containers, chips
• Manufacturers raise prices to cover increased costs

3. Printing Money Inflation - Excessive circulation of money

When the government prints large amounts of money, more money circulates in the system, but goods do not increase. The result is that the value of money decreases, leading to severe inflation (Hyper Inflation).

What you need to know - How is inflation measured?

Every month, Thailand’s Ministry of Commerce collects prices of 430 items and calculates the Consumer Price Index (CPI).

An increase in CPI year-over-year (YoY) is the general inflation rate that the Bank of Thailand closely monitors.

Example: The Consumer Price Index in January 2024 was 110.3, up 0.3% compared to the previous year.

Most importantly: Thailand’s inflation rate in January 2024 was 1.11%, continuing to decline, the lowest in 35 months, due to falling energy prices and lower prices of fresh vegetables and meats.

Who is affected by inflation?

Advantageous groups:

• Business owners/traders: Can raise prices easily, increasing profits
• Shareholders: Stock values rise because company profits increase
• Debtors: Repay debts with less valuable money

Disadvantaged groups:

• Salaried employees: Wages do not keep pace with inflation
• People with savings: Money sitting idle loses value daily
• Creditors: Get back money worth less

Real example: PTT in the first half of 2021 made a net profit of 64,419 million baht, up 12.7% year-over-year, because oil prices surged. This shows that oil and gas businesses benefit from inflation.

How much have essential goods changed?

Look at the changes over 4 years:

It’s clear these prices fluctuate, but the overall trend of rising costs directly impacts living expenses.

How do deflation and inflation differ?

Inflation (Inflation)

Prices rise, money decreases in value. The economy functions normally, but if it’s too high, it becomes problematic.

Deflation (Deflation)

Conversely — prices fall, money gains value. Sounds good, but it’s actually a sign of economic recession.

Deflation occurs when:

• Demand for goods decreases
• Money in circulation is insufficient
• Producers are willing to lower prices to sell products
• Producers cut investments and reduce staff, leading to economic slowdown

In short: Normal inflation + deflation = no other options, both are bad, leading to a deadlock.

How does inflation impact daily life?

Impact on the public

Expenses increase but income does not → purchasing power declines → some goods are no longer affordable.

Impact on entrepreneurs

Costs rise but consumer spending drops → profits decrease → reduce new investments → lay off employees.

Impact on the entire country

If inflation gets too high, it leads to Stagflation — high inflation with stagnant economic growth.

This situation is terrible: expensive money, low consumer spending, business halts, unemployment rises, GDP stagnates… very bad.

What does IMF data say?

According to IMF’s global economic outlook as of January 2024:

• Global economy is expected to grow 3.1% in 2024 and 3.2% in 2025
• Inflation rates are gradually decreasing worldwide, avoiding hard landings
• Risks remain: geopolitical tensions + supply disruptions
• Central banks must balance “taming inflation” with “not choking the economy”

In simple terms: The world is walking on a tightrope — caution is needed.

When inflation occurs, what should investors do?

1. Invest in stocks benefiting from inflation

Bank stocks: Interest rates rise → bank profits increase → higher dividends

Insurance stocks: Holding government bonds → yields rise → profits soar

Food stocks: Essential goods → consumers must buy → pricing power increases → higher margins

2. Gold - a safe asset

Gold prices tend to move in tandem with inflation → when inflation is high, gold prices go up too.

The most cost-effective way to trade gold is via CFD — no need to buy physical gold, can “speculate on price movements” up and down.

3. Floating Rate Bonds

Choose Floating Rate Bonds or Inflation-Linked Bonds — pay interest adjusted to inflation → returns are protected from loss of value.

4. Real estate + REIT funds

Rents adjust upward with inflation → unaffected by stock market fluctuations → suitable for relatively conservative investors.

5. Financial protection strategies

• Avoid bad debt: Don’t take on debt that doesn’t generate income
• Reduce unnecessary spending: Buy only essentials
• Stay informed: Changes in inflation influence investment decisions

Summary - Why do investors need to understand inflation?

Inflation is not a monster to fear but an opportunity to leverage.

• Moderate inflation = economic growth, employment → good for the economy
• Excessive inflation = problems, people, profits, business expansion decline, layoffs → Stagflation
• Currently: Thailand’s economy has not entered a Stagflation phase but requires close monitoring.

Good news: Thailand’s inflation rate in January 2024 is 1.11%, continuing to decline → manageable.

Investors should keep an ear on economic news, identify key factors, and adjust their strategies timely. Turn inflation from a threat into a ladder to reach hundreds of thousands, not a staircase leading to losses.