What is inflation and its impact on investment and daily life

In the current era, investors and the general public are all facing “Inflation (Inflation),” which is an economic phenomenon that impacts every aspect of daily life. This article will help you understand the mechanisms of inflation, the causes behind it, and appropriate investment strategies to protect your capital from its erosion.

Inflation: Meaning and Impact on Money’s Value

Inflation is an economic situation where the prices of goods and services tend to rise continuously. From the perspective of money’s value, inflation means a decrease in the worth of money itself. That is, with the same amount of money, you can buy fewer goods than before. Simply put, inflation makes things more expensive.

Symbolic example of inflation

Imagine a case where a prime minister has 50 baht. Ten years ago, this amount could buy several bowls of rice. But today, the price has increased so that 50 baht can only buy one bowl. If this trend continues, in 30 years, a bowl of rice might cost 100 baht or more.

Inflation is not only a measure of economic efficiency for fiscal policy but also a key factor that investors must consider when making investment decisions. Rising or falling inflation rates directly affect stock market movements.

Who Benefits from Inflation?

The groups that benefit from inflation are small business owners, traders, and income earners who can adjust their prices according to market conditions. They can raise the prices of their goods and services as needed.

Conversely, salaried employees tend to be disadvantaged, even if their salaries increase. The rate of salary increase often lags behind inflation, which effectively reduces their purchasing power.

Causes of Current Inflation

The inflation happening now has several causes, making the situation more complex:

Demand and Supply Factors

After the global economy began recovering from the pandemic, consumers increased their demand for goods and services significantly—(Revenge Spending)—especially from populations with accumulated savings from staying at home. However, production and services were insufficient to meet this demand, leading sellers to raise prices.

Rising costs of food commodities

Prices of basic food commodities such as natural gas, crude oil, coal, iron, and copper have increased substantially due to disruptions in production. Major oil-exporting countries have also limited output to maintain prices. A clear example is the change in crude oil prices from the lowest levels in 2020 () during lockdowns to the highest levels as countries reopened.

Supply chain constraints

The “Supply Chain Disruption” problem has shown shortages of shipping containers and microchips needed for high-demand electronic devices, driven by the Work From Home era.

Basic Measures to Measure Inflation

Consumer Price Index (CPI)

Every month, the Ministry of Commerce collects data on the prices of 430 items to calculate the Consumer Price Index (CPI). An increase in CPI compared to the previous year is the inflation rate that the Bank of Thailand targets.

Latest inflation data

Data from January 2024 shows CPI at 110.3 (Base year 2019 = 100), an increase of 0.3% from the same month last year. The Year-over-Year inflation rate (Year-over-Year) has decreased to 1.11%, continuing a downward trend for the fourth month and reaching the lowest level in 35 months.

This decline is due to falling prices in energy groups, supported by government energy cost reduction measures, and continued decreases in fresh food prices, especially vegetables and meats, as production has increased in the market.

Price volatility of essential goods

Comparing the average prices of basic goods from 2021 to 2024 shows clear fluctuations:

Main Causes of Inflation

Generally, inflation arises from three main causes:

1. Demand-Pull Inflation (Demand-driven inflation)

When consumers demand more goods and services but producers cannot supply enough, sellers have the opportunity to raise prices.

2. Cost-Push Inflation (Cost-driven inflation)

When production costs increase, producers must raise prices to maintain profit margins.

3. Printing Money Inflation (Money supply inflation)

When the government prints more money, the total money in the economy increases, making inflation harder to control.

Inflation vs. Deflation: The Difference

Deflation (Deflation) is the opposite of inflation, occurring when prices of goods and services decrease continuously due to reduced demand or insufficient money circulation.

Effects of Inflation on Daily Life and the Economy

Impact on households

• Higher living costs reduce people’s purchasing power.
• Increased expenses, especially for essentials like food, energy, and medicines.
• Financial stress rises as income does not keep pace with rising costs.

Impact on entrepreneurs

• Decreased sales due to lower consumer spending.
• Higher production costs reduce profits.
• Delayed investment decisions, leading to lower employment.

Impact on structural economy

• Slower long-term development due to reduced productive investments.
• Asset bubbles form when real interest rates are negative.
• Financial imbalances increase from soaring household debt.

Investment Strategies in the Era of Inflation

1. Invest in suitable debt instruments

Choose Floating Rate Bonds or Inflation-Linked Bonds that adjust interest rates according to market conditions and inflation changes. Preferably, buy bonds with high credibility.

2. Invest in fixed-value assets

Gold is a good choice because its price tends to move in the same direction as inflation and it always has intrinsic value. As inflation rises, gold prices tend to increase accordingly.

3. Invest in real estate

Rental rates tend to follow inflation, making this investment less volatile than industrial and stock markets.

4. Invest in stocks that benefit

Bank stocks benefit from rising interest rates as net interest margins increase.

Insurance stocks invest in government bonds with returns linked to inflation.

Food sector stocks benefit from steady demand for essential goods.

5. Speculate on gold via CFD

A popular way to profit from gold is trading CFDs, which allow speculation on both rising and falling prices without owning the actual asset.

Other Household Adjustment Measures

• Plan investments to include assets with returns higher than deposit interest rates.
• Avoid unnecessary debt and practice disciplined spending.
• Create additional cash flow to keep up with rising expenses.
• Stay informed about economic news to prepare for upcoming events.

Conclusion: Understanding Inflation to Protect Your Capital

Inflation is an unavoidable economic phenomenon. The key is to understand its mechanisms and adapt appropriately to safeguard your funds and enhance your investment value.

While moderate inflation can promote economic growth, excessive inflation leading to “Hyperinflation” can threaten the economy and society. Therefore, investors should closely monitor data and indicators to choose smart investment strategies that yield good returns in the long term.