Understanding Inflation: Causes and How Investors Can Respond

First, let’s get to know inflation first

When thinking about inflation, most people probably understand it similarly—that is, rising prices of goods, with money in hand buying less or, in other words, depreciation of the currency. Over time, prices keep increasing, and the value of money diminishes accordingly.

Just imagine simply: 50 baht today might buy many items, but ten years from now, 50 baht probably won’t buy the same things. That is the power of inflation gradually eroding the value of money every day.

Where does inflation come from?

First factor: Demand Pull Inflation - when demand exceeds supply

Suppose the market is full of buyers but there isn’t enough supply. Sellers are encouraged to raise prices, which is a situation that occurs after the global economy recovers from a pandemic. People who have saved money for months now want to spend (Revenge Spending), but factories can’t keep up with production, leading to shortages and soaring prices.

Second factor: Cost Push Inflation - production costs are already high

The price of crude oil increases due to global market trends. Natural gas becomes more expensive. Manufacturing companies have to bear higher costs. With no other options, they raise their product prices accordingly. Additionally, supply chain disruptions—container shortages, scarce semiconductor chips—all contribute to rising costs.

Third factor: Printing Money Inflation - when the government prints money

This is straightforward: the government increases the money supply in the economy excessively, causing the currency to lose value, which results in severe inflation.

Reality: The inflation the world faces stems from multiple causes mixed together

It’s not just a single reason that causes the global economy to experience inflation. According to IMF data in January 2024, the world economy is expected to grow at 3.1% in 2024, but several challenges make the situation complex.

The recovery of the US, though strong, comes with unprecedented high inflation. The employment system has not fully recovered. Geopolitical tensions persist. All these issues create a brewing storm.

The real question: Who benefits and who gets disadvantaged?

It must be acknowledged that inflation isn’t necessarily bad for everyone.

Beneficiaries:

• Traders and entrepreneurs - because they can raise prices in line with inflation, increasing profits. Business expansion becomes easier. For example, PTT Public Company Limited in the first half of 2023 reported a net profit of 64,419 million baht, a 12.7% increase from the previous year, just because oil prices surged.
• Shareholders, bankers, debtors - benefit from higher returns.

Disadvantaged:

• Salaried workers - their wages increase less than inflation, reducing their real purchasing power.
• Those with fixed income - cannot adjust prices like entrepreneurs.
• Creditors - because the purchasing power of the money they get back decreases.

Inflation and deflation: two sides of the same coin

Inflation: soaring prices, currency depreciation

Deflation: falling prices, sluggish market, decreased demand

Both are detrimental to the economy. Coupled with the problem of Stagflation—high inflation but economic stagnation—becoming a nightmare for policymakers.

How inflation affects our daily lives

Look at actual market figures:

Prices change every year. The goods we buy almost daily keep getting more expensive, increasing our cost of living.

How to measure inflation

The Ministry of Commerce collects data on 430 product prices monthly and calculates the Consumer Price Index (CPI). The increase in CPI compared to the previous year indicates the general inflation rate.

January 2024 data:

• CPI is 110.3 (Base 2019=100)
• General inflation rate decreased to 1.11% (YoY)
• The lowest in 35 months

Consumer Price Index for January 2024 compared to last year

Besides product prices, key indicators have also changed: fuel prices increased for the first time after four consecutive months of decline, electricity costs rose, transportation fares increased, but fresh vegetables and fruits continued to decrease.

What should investors do when inflation occurs?

1. Adjust investment plans

Deposit interest rates are too low during inflation. Saving cash isn’t a smart move. Instead, invest in assets that offer higher returns, such as stocks, mutual funds, real estate.

2. Avoid bad debt

Reduce borrowing that doesn’t generate income. Plan expenses more strictly. Think carefully before buying unnecessary items.

3. Find safe assets

Gold is a good choice because its price moves in line with inflation. When inflation is high, gold prices tend to rise as well. This asset doesn’t deteriorate over time.

4. Follow economic news

Inflation affects everyone. Stay informed and monitor the situation constantly.

What to invest in during inflation

High-interest deposits

Fixed deposit accounts offer higher returns but still below inflation.

Real estate funds

Rental rates adjust with inflation. They are less volatile than stocks. Those with extra cash can buy property for investment.

Floating Rate Bonds and Inflation-Linked Bonds

These bonds adjust interest rates according to inflation changes. They offer better returns but require choosing credible issuers.

Gold and CFD Trading

Gold is a way to hold assets. CFD trading allows investors to “speculate on both rising and falling markets” without owning the actual assets.

Stocks benefiting from inflation

Summary: Inflation isn’t an enemy if used wisely

Inflation is a market movement phase. For those who understand the mechanisms, suitable assets can become tools for profit—whether it’s bank stocks, real estate, or gold—all grounded in solid economic fundamentals.

However, the chaotic market environment, ongoing geopolitical tensions, supply chain issues, and policy balancing act—aiming to reduce inflation without further slowing the economy—require investors to stay alert, follow news, and study information carefully before making investment decisions. Because every decision in the world of money involves risk, knowledge and preparation are the best supplies.