Understanding inflation and its impact on savings and investments

The current economic situation is something that must be studied and monitored carefully, especially when it comes to inflation, which is an economic phenomenon that directly impacts people’s daily lives—from buying everyday goods to planning investments and savings. This article will present a new perspective on inflation, its causes, and how to adapt appropriately.

What is Inflation?

Inflation is an economic condition where the prices of goods and services tend to rise continuously. Conversely, inflation also means that the value of money decreases steadily, making it more expensive to purchase the same item. In other words, inflation is a phenomenon that causes goods to become increasingly expensive.

Real-life example of inflation

Imagine Mr. Korn has 50 baht. In the past, this amount was enough for him to buy several plates of rice. But over time, food prices have kept rising until his 50 baht only suffices for one plate. Looking ahead over several decades, prices are expected to reach 100 baht per plate.

Inflation is not only an economic indicator but also a key factor that investors must consider when making decisions in the stock market, as expectations of rising or falling inflation rates significantly impact market performance.

Who Benefits from Inflation?

The groups that benefit most from inflation include entrepreneurs, traders, or those with income sources that can flexibly adjust prices, as they can freely increase their product prices.

In contrast, salaried employees are in a very different situation. Even if their wages increase, the rate of increase often lags behind inflation, leading to a decrease in their purchasing power over time.

Main Causes of Modern Inflation

Current inflation has several causes. First, as the global economy gradually recovers from the pandemic, consumer demand for goods and services surges—called Revenge Spending—especially among those with substantial savings accumulated during the pandemic.

However, the production capacity often cannot keep up with this surge in demand. Additionally, production costs have risen sharply due to significant increases in global commodity prices, including crude oil, natural gas, coal, iron, and copper.

Furthermore, supply chain disruptions have become a major issue—from shortages of shipping containers to shortages of semiconductor chips used in electronic devices, driven by increased demand for remote work.

Deep Dive into Inflation Components

A detailed study of inflation can be divided into three main points:

First: Demand-pull inflation — When consumer demand for goods and services increases while supply remains limited, sellers raise prices to capitalize on the opportunity.

Second: Cost-push inflation — When producers face higher costs, they pass these costs onto consumers by raising prices to maintain profit margins.

Third: Printing money by the government — When governments inject large amounts of money into the economy, it can lead to severe inflation.

Understanding Thailand’s Inflation Rate

According to statistics from the Office of Trade Policy and Strategy, in January 2024, the Consumer Price Index (CPI) was 110.3, up 0.3% year-over-year. The overall inflation rate (YoY) decreased to 1.11%, the lowest in 35 months.

This decline is mainly due to falling energy prices, thanks to government measures to reduce energy costs, as well as decreases in fresh vegetable and meat prices, largely driven by increased supply in the market.

Looking back historically, Thailand experienced higher inflation levels during special circumstances, such as in 1974 when inflation hit 24.3% due to the Middle East oil crisis, or in 1998 when inflation exceeded 7.89% following a sharp depreciation of the Thai baht.

Inflation vs. Deflation: Similarities and Differences

Deflation is the opposite scenario of inflation. Instead of rising prices, the prices of goods and services decrease steadily. Deflation occurs when demand drops or when the money supply in the economy is insufficient.

While falling prices might seem beneficial, deflation is actually more dangerous for the economy. It discourages production, increases unemployment, and slows GDP growth.

Impact of Inflation on Daily Life

When inflation occurs, its effects are most visible in people’s wallets. Here are some changes in the prices of basic food items between 2021 and 2024:

From the table above, it’s clear that essential food items, especially energy-related products, have increased significantly, leading to a multiple-fold rise in living costs.

( Global economic impact and the possibility of stagflation

According to the International Monetary Fund (IMF) update in January 2024, the global economy is expected to grow at 3.1% in 2024 and 3.2% in 2025, higher than previous forecasts.

However, there are several signs indicating that the economy may enter stagflation—a situation characterized by high inflation and stagnant growth. Tight monetary policies, reduced fiscal support, and low productivity growth are key factors.

If Thailand were to experience stagflation, it would result in decreased purchasing power, reduced consumer spending, and difficulties for businesses in selling products. This could lead to price cuts, shrinking profits, reluctance to expand, layoffs, rising unemployment, and business closures—an economic slowdown nobody desires.

Sectors Benefiting from Inflation

In an inflationary environment, certain sectors’ stocks tend to benefit. Banking stocks are considered positively affected because rising interest rates increase net interest margins.

Insurance companies are also attractive, as many invest in high-yield bonds, which generate higher returns when interest rates rise.

Food, energy, and commodity stocks also tend to benefit because inflation is reflected in rising prices of goods. Companies in these sectors can raise prices without much resistance.

For example, PTT Public Company Limited, a major oil company in Thailand, reported in the first half of 2022 revenue of 1,685,419 million THB and net profit of 64,419 million THB, an increase of 12.7% compared to the same period last year. This clearly shows energy companies can generate substantial profits during inflation.

Pros and Cons of Inflation

) Advantages

✅ Promotes economic growth — When prices rise, entrepreneurs are motivated to expand their businesses, leading to increased employment, higher income for people, and more money circulating in the economy.

✅ Reduces unemployment — A growing economy demands more investment, which creates more jobs to meet the demand for goods and services.

( Disadvantages

❌ Reduces consumers’ purchasing power — Rapid inflation means consumers can buy less with the same amount of money, leading to decreased sales.

❌ Economic imbalance — Excessive inflation, known as )Hyperinflation(, can cause economic decline, rising unemployment, and negative GDP growth.

❌ Decreases savings value — People who save money without investing will find their savings eroding in value, destabilizing the economic system.

Investment Strategies During Inflation

To mitigate the impact of inflation, investors should consider the following options:

High-interest savings accounts — Fixed deposit accounts with higher-than-average interest rates can be a good starting point. Although returns may not fully match inflation, they are better than holding cash.

Investing in assets with intrinsic value — Gold is a classic choice because its price tends to move in tandem with inflation; as inflation rises, gold prices generally increase.

Real estate — Investing in property, land, or rental spaces is less volatile than stocks. Rental income often tracks inflation, providing a hedge against rising prices.

Inflation-linked bonds — Investing in Floating Rate Bonds or Inflation-Linked Bonds can offer returns that adjust with interest rates and inflation.

Beneficial sectors during inflation — Stocks in banking, insurance, energy, and food sectors are generally advantageous in inflationary periods.

Preparing for the Future

When planning to cope with inflation, the key is strategic investment planning—allocating funds into assets that outperform inflation. Avoid unnecessary debt that does not generate income, and stay informed about economic news, as inflation and its effects will impact everyone. Knowledge of economic changes is crucial for making sound financial decisions.

Summary

Inflation is a complex economic phenomenon with both advantages and disadvantages. Moderate inflation can promote economic growth, but excessive inflation may lead to severe hyperinflation.

The key is careful investment planning, choosing safe assets, and staying updated with economic news. By doing so, investors can reduce the impact of inflation and build long-term financial stability for themselves and their families.