Understanding Inflation: How It Differs from Deflation and How to Cope

Inflation is Coming: Adjust Your Portfolio to Preserve Capital

The current economic situation is full of challenges, with rising prices of food, oil, and energy. Countries around the world are facing persistent inflation issues. Investors and households are adjusting to live within their means. This article will reveal the mechanisms of inflation and deflation, along with strategies to protect your capital.

What is Inflation? Meaning and Impact

Inflation occurs when the prices of goods and services continuously increase, meaning your purchasing power decreases. Previously, 50 baht could buy many bowls of rice, but now the same amount only buys one. This is inflation in simple terms.

As of January 2024, Thailand’s Consumer Price Index (CPI) stands at 110.3. The overall inflation rate (YoY) has decreased to 1.11%, continuing for the 4th consecutive month, the lowest in 35 months.

It is a necessary dimension for government economic decision-making and a key indicator for investors to assess stock market performance.

Who Benefits from Inflation

Small business operators, traders, or earners with flexible income can adjust their prices according to market demand. Unlike salaried employees, whose salary increases often lag behind rising inflation, leading to a real decrease in purchasing power.

A clear example is PTT Public Company Limited ( in the first half of 2022, which reported a net profit of 64,419 million baht, an increase of 12.7% compared to the previous year, due to significantly higher oil and gas prices.

Where Does Inflation Come From?

) Three Main Factors

1. Demand Pull Inflation - Demand exceeds supply
Consumers have increased demand for goods and services, but production is insufficient. Sellers raise prices accordingly.

2. Cost Push Inflation - Rising production costs
Global prices of oil, natural gas, coal, steel, and copper have increased due to halted production and supply constraints. Producers raise prices to cover these costs.

3. Printing Money Inflation - Excess money supply
Governments inject massive amounts of money into the system, causing severe inflation.

Current Situation

The global economy is intertwined with various factors. According to IMF reports as of January 2024, the global economy is expected to grow by 3.1% in 2024 and 3.2% in 2025. Although major economies like the US and some emerging markets show strong growth, tight monetary policies, reduced financial support, and low productivity growth still limit expansion.

Thailand has not yet entered a Stagflation ### high prices and stagnant growth (, but some signals indicate that this risk remains, requiring close monitoring.

How Much Have Prices Changed for Essential Goods?

Examples of key food and energy prices:

Inflation vs. Deflation: Opposite but Equally Damaging

Deflation is the opposite scenario, where prices of goods and services decrease steadily. It results from decreased demand or insufficient money supply.

Comparison table:

Both conditions harm the economy and quality of life, especially if severe and prolonged.

How Inflation Affects Daily Life

) For the General Public
Living costs increase, leading consumers to buy less. Budget plans become insufficient for actual expenses.

For Entrepreneurs

Sales decline as prices rise, while production costs also increase. Entrepreneurs delay investments and reduce staff.

For the Country as a Whole

If inflation limits consumption, businesses will scale back expansion. Bubbles may form in asset markets, financial imbalances grow, and household debt rises. Long-term productivity development may slow down.

How to Measure Inflation: CPI and Related Data

The Ministry of Commerce collects prices of 430 goods and services monthly, then calculates the Consumer Price Index ###CPI(. The increase in CPI compared to the previous year is the general inflation rate targeted by the central bank.

CPI data is reported as:

• YoY )Year-on-Year(: comparison with the same month last year
• MoM )Month-on-Month(: comparison with the previous month

How to Hedge Against Inflation: Strategies for Investors

) 1. Adjust Investment Plans
In an inflationary environment, deposit interest rates are low. Invest in assets with higher returns, such as stocks, mutual funds, or real estate.

2. Avoid Bad Debt

Limit borrowing, think carefully before spending, reduce unnecessary purchases, and plan expenses strictly.

3. Invest in Stable Assets

Gold and real estate are safe options as they retain intrinsic value.

4. Keep Up with News

Inflation fluctuates with global conditions. Staying updated helps you prepare better.

Assets to Invest in During Inflation

High-Interest Savings Accounts

Fixed deposit accounts offer higher returns than regular savings, provided you maintain the required term.

Beneficial Stocks in Inflationary Times

Bank Stocks - When interest rates rise, banks’ net interest margins increase, boosting profitability.

Insurance Stocks - Insurance companies invest in assets that yield higher returns with inflation, such as government bonds.

Food Sector Stocks - Food is a necessity; companies can adjust prices to maintain margins.

Inflation-Linked Bonds

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

Gold - A Timeless Asset

Gold prices move in tandem with inflation. When inflation is high, gold prices tend to rise. CFD trading in gold is popular, allowing speculation on both rising and falling prices without owning the physical asset.

Real Estate Funds

Rental rates tend to adjust with inflation. They carry lower risk than stocks and offer returns through dividends and capital appreciation.

Summary: Inflation and Deflation in Overview

Inflation results from high demand and limited supply. Moderate inflation naturally promotes economic growth, employment, and circulation of money. However, if inflation becomes excessive, leading to Hyperinflation, it becomes a threat to the economy, akin to deflation, where prices decline.

Investors can profit during inflation by investing in bank, insurance, food stocks, gold, or inflation-linked bonds. Monitoring news and adapting strategies are key to preserving and growing capital in changing economic conditions.