Inflation Rate Rises: What Investors Need to Know and How to Adapt Accordingly

This article will help investors gain a deep understanding of inflation and how it differs from deflation, along with appropriate investment strategies in such situations.

What exactly is inflation?

Inflation is an economic condition where the inflation rate increases, meaning that the price levels of goods and services tend to rise continuously. From the perspective of money’s value, inflation is a situation where the currency decreases in value, requiring more money to buy the same goods.

Example of changes in inflation rate in daily life

Mr. Somseri once had 50 baht, which could buy many bowls of rice happily. But now, that money can only buy one bowl. Imagine decades from now, rice prices will inevitably rise to 100 baht per bowl. This illustrates the impact of inflation on people’s purchasing power.

This inflation not only serves as an indicator for economic policy decisions but also is a key factor that investors use to decide on asset allocations in the stock market. Because forecasts of rising or falling inflation directly affect stock market performance.

Who benefits and who suffers from inflation?

Beneficiaries

Private entrepreneurs, traders, and those with flexible income can adjust prices of goods and services according to the situation. Additionally, shareholders, gold seekers, and financial institutions can all profit from this environment.

Those who are disadvantaged

Employees with fixed salaries are the most at risk. Even if their salaries increase, the growth rate often lags behind inflation, reducing their real purchasing power. Creditors also lose out because the money they receive diminishes in value.

Main causes of rising inflation

Three basic causes

1. Demand-pull inflation (Demand Pull Inflation)

Consumers demand more goods and services, but market supply is insufficient, giving sellers the freedom to raise prices.

2. Cost-push inflation (Cost Push Inflation)

Producers face higher costs due to global commodity prices such as natural gas, crude oil, coal, iron, and copper. As costs rise, producers pass on these increases to consumers through higher prices.

3. Printing money (Printing Money Inflation)

When the government prints large amounts of money, it creates severe inflation.

Deeper causes in the current context

The global economic recovery after COVID-19 has led consumers to spend massively (revenge spending) while supply remains constrained. Supply chain disruptions (supply chain disruption), such as shortages of containers and semiconductors, further push up production costs.

Additionally, geopolitical tensions, such as the Russia-Ukraine war, have caused global energy prices to rise and remain high.

Current economic situation: Is stagflation approaching?

Economic signals indicate that the world is nearing stagflation (a situation with high inflation and economic stagnation). According to IMF data from January 2024:

• The global economy is expected to grow only 3.1% in 2024 and 3.2% in 2025, below the historical average.
• This slow growth results from tight monetary policies, reduced financial support, and sluggish productivity growth.
• Geopolitical tensions and supply disruptions remain significant risks.

If Thailand enters stagflation, people’s purchasing power will decline. Businesses will be unable to sell products, leading to layoffs, higher unemployment, and slow GDP growth. This is an economic scenario nobody wants. However, Thailand’s economy has not fully entered this phase yet, but close monitoring is necessary.

How is inflation measured?

Every month, the Ministry of Commerce collects prices of 430 items and calculates the Consumer Price Index (CPI). An increase in CPI compared to the previous year indicates general inflation that the Bank of Thailand targets.

( Latest statistics )January 2024###

Consumer Price Index = 110.3 (up 0.3% from the same month last year)

• Year-on-Year inflation rate (Year-on-Year): decreased to 1.11%, continuing a four-month decline, the lowest in 35 months.
• Month-on-Month CPI (Month-on-Month): increased by 0.02%, due to rises in energy and other service costs.

The decline in inflation is due to government measures to reduce energy prices and increased agricultural productivity.

Thailand’s inflation history

A look back at the historical volatility:

• 1974: Inflation exceeded 24.3% due to the Israel-Arab war.
• 1980: Surpassed 18% amid the Iran-Iraq war.
• 1998: Reached 7.89% after the 1997 economic crisis, which weakened the baht.
• 2008: Rose 5.51% driven by global trends.
• May 2022: Surpassed 7.10% due to the Russia-Ukraine war.

( Examples of companies benefiting

PTT Public Company Limited in the first half of 2022 had revenue of 1,685,419 million baht and net profit of 64,419 million baht, growing 12.7% compared to the previous year, driven by rising oil prices due to inflation.

Deflation vs. inflation: what’s the difference?

Inflation occurs when prices of goods and services increase continuously, reducing the value of money. It generally benefits entrepreneurs and shareholders.

Deflation is the opposite, where prices decrease continuously, leading to economic stagnation, lower sales, and sluggish economic activity.

Effects of inflation on people, the economy, and daily life

) Effects on the general public

Cost of living rises reduce purchasing power, leading to fewer goods and services bought, and increasing daily expenses.

Effects on entrepreneurs

Higher production costs may lead to decreased sales as consumers buy less. Some businesses may need to lay off staff or delay investments.

( Effects on the national economy

Consumers buy less, businesses sell less, and investment in goods slows down. Long-term production capacity diminishes. High inflation encourages speculation in risky assets, risking bubbles and other assets.

) Effects on daily living costs

Basic goods like meat, oil, and vegetables become more expensive, increasing household expenses.

Price comparison table of essential goods over years

This data shows that inflation causes significant changes in essential goods prices. Moreover, household expenses continue to rise.

Strategies for adapting and investing as inflation increases

1. Active investment planning

In an inflationary environment, bank deposit interest rates are low. Investing in higher-yield assets such as stocks, mutual funds, or real estate is advisable.

2. Avoid bad debt

Avoid borrowing for unnecessary items. Plan expenses carefully and save. Do not buy unnecessary goods.

3. Invest in stable assets

Gold is a good choice because it has intrinsic value, does not deteriorate, and often appreciates with inflation. Trading CFDs on gold is popular, allowing profit from both rising and falling prices.

4. Follow economic news

Inflation impacts financial stability and daily life. Close monitoring of economic news is essential to prepare for potential changes.

Investment options during inflation

High-interest savings accounts

Time deposit accounts where deposits are made monthly for the period specified by the bank ###12 months or 36 months###, offering higher interest than regular savings.

Real estate funds

Rental rates tend to follow inflation, and returns from rent and property appreciation increase. However, investors should study details carefully due to risks involved.

Floating rate bonds (and inflation-linked bonds

Choose bonds with interest rates that adjust according to inflation conditions, and select credible issuers.

) Gold

Gold moves in tandem with inflation, offering stability and long-term speculative opportunities. When inflation rises, gold prices tend to increase. CFD trading on gold is popular because it allows speculation on both upward and downward movements.

Beneficial sectors during inflation

Banking stocks

Banks profit from net interest margins; as interest rates rise, bank profits increase accordingly.

(# Insurance stocks Insurance companies invest in government bonds and debt instruments, with yields rising in line with inflation.

)# Food stocks Food products are necessities; producers have pricing power because demand remains steady.

Summary

Inflation and rising inflation rate are phenomena that impact the economy and daily life. Moderate inflation can help economic expansion and growth, but if it becomes excessive ###Hyper Inflation###, it becomes a threat to livelihoods.

Investors can profit from inflation by investing in suitable assets such as beneficial stocks, gold, or inflation-linked bonds. The key is to stay informed about economic news regularly to adapt appropriately.