Inflation and Deflation: Strategies to Profit from Economic Changes

Many investors often confuse two major economic conditions: Inflation and Deflation. This article will clarify the understanding of these two states, how to differentiate them, and most importantly, how to adapt and plan investments when the economy shifts.

Understanding Inflation and Currency Value Changes

Causes of Inflation

Inflation is a condition where the price levels of goods and services tend to rise continuously. This phenomenon can be viewed from different angles—either from the price of goods or from the perspective of currency value. When prices increase, it means the value of money decreases, resulting in the same amount of money buying fewer goods than before.

There are three main factors causing inflation:

First, is an increase in demand (Demand Pull Inflation). When the supply of goods and services in the market is insufficient, sellers can raise prices.

Second, is rising production costs (Cost Push Inflation). Whether due to expensive raw materials like natural gas, crude oil, steel, copper, or supply chain shortages, producers must increase prices to maintain profits.

Third, is the printing of large amounts of money by the government (Printing Money Inflation), significantly increasing the money supply in the economy.

Looking at the current global economic situation, inflation results from multiple factors, including unbalanced recovery, higher demand for essential goods, slowed production, and export restrictions by food and energy-producing countries.

Real-life example of Inflation

Imagine a simple scenario: Mr. A has 50 baht. Many years ago, this amount could buy several bowls of rice porridge. But today, rice prices have continuously risen. Therefore, 50 baht now can only buy one bowl. If we look several years ahead, prices are expected to reach 100 baht per bowl.

This illustrates the reality of inflation impacting ordinary citizens.

How Inflation Differs from Deflation

Meaning and Causes of Deflation

Deflation is the opposite of inflation. It occurs when the price levels of goods and services tend to decrease steadily.

Causes of deflation often include:

• Reduced consumer demand
• Insufficient money circulation in the economy
• Producers lowering prices to stimulate sales

The result is that producers cut back on production, reduce investments, and ultimately, the economy may stagnate.

Comparing Inflation and Deflation

Who Benefits and Who Loses in Inflation

Beneficiaries

Entrepreneurs and traders benefit the most because they can raise prices of their goods according to reality, unlike salaried employees whose wages increase at a slower rate than inflation.

Debtors, such as homeowners with loans, may benefit because the real value of the money they repay decreases (if interest rates are fixed).

Banks and shareholders also gain when inflation is at a healthy level, as interest income and profits increase.

Those Who Lose

Fixed-income earners suffer because their wages do not keep pace with rising prices.

Lenders lose because the money they receive back has less purchasing power.

Money savers who deposit at low-interest rates relative to inflation will inevitably be at a disadvantage.

Effects of Inflation on Daily Life and the Economy

Increased Cost of Living

Everyday goods such as meat, fresh vegetables, spices, LPG, and rubber experience significant price changes each year.

When Thai households look at annual price tables, they see:

• Red pork from 137.5 baht/kg in 2021 to 205 baht/kg in 2022
• Chicken breast from 67.5 baht/kg to 105 baht/kg
• Chili peppers from 45 baht/kg soaring to 185-200 baht/kg

These rising living costs put pressure on people’s real income.

Impact on Business Operations

When inflation rises rapidly, consumers tend to cut back on purchases, leading to decreased sales. Meanwhile, production costs also increase, prompting some businesses to slow expansion, reduce new investments, or even cut workforce.

Dangerous Stagflation Scenario

When inflation is high but GDP growth is low, the economy enters a stagflation state, which is the most dangerous scenario. The economy stagnates, prices are high, unemployment rises, and everyone faces a difficult dilemma.

Consumer Price Index (CPI) Insights

How Thailand Measures Inflation

Every month, Thailand’s Ministry of Commerce collects data on 430 goods and services and calculates the Consumer Price Index (CPI).

An increase in CPI compared to the previous year indicates the inflation rate used as a target by the Bank of Thailand.

Latest Data: January 2024 CPI

According to the January 2024 CPI report:

• The consumer price index is at 110.3, up 0.3% compared to the same period last year.
• The YoY inflation rate (YoY) has decreased to 1.11%, the lowest in 35 months.
• This decline is driven by falling energy prices and increased vegetable yields.

A lower inflation rate is good news for consumers, but ongoing monitoring is necessary to see if it will rebound.

Investment Strategies During Inflation

Careful Planning

When inflation occurs, deposit interest rates tend to be low. Therefore, it’s essential to shift funds into assets that offer higher returns, such as stocks, mutual funds, or real estate.

Avoid Unnecessary Debt

Taking on debt to buy non-essential items is a self-limiting move. During inflation, it’s wise to plan expenses carefully and avoid purchasing unnecessary goods.

Choose Stable Assets

Gold, real estate, and stocks of stable companies are good options because their values tend not to depreciate over time and may even increase with inflation.

Regularly Follow Economic News

Inflation impacts everyone’s financial standing. Staying informed about economic conditions is crucial for making sound investment decisions.

Good Investment Options in an Inflationary Era

High-Interest Savings Accounts

High-yield savings accounts that offer above-average interest rates (High-Yield Savings) are suitable for risk-averse investors, but the interest must exceed inflation to generate real gains.

Real Estate Funds (REIT)

Rents tend to move with inflation, making REITs a good hedge (Hedge). Besides dividends, real estate assets can appreciate over time.

Bonds (Bonds)

Opt for Floating Rate Bonds or Inflation-Linked Bonds that adjust interest rates according to inflation, and choose issuers with strong creditworthiness.

Gold - All Assets

Gold moves in tandem with inflation; as inflation rises, gold prices tend to increase. Buying gold or trading CFD gold are effective ways to profit from this scenario.

Stocks Benefiting from Inflation

Bank stocks: Banks earn from interest rate spreads; when rates rise, bank profits increase.

Insurance stocks: Insurance companies investing in government bonds see higher returns, boosting profits.

Food stocks: Food is a necessity. Food producers have pricing power and can pass costs to consumers.

Energy stocks: For example, PTT Public Company Limited (Public) benefits greatly from oil price movements. In the first half of the year, PTT’s net profit was 64.419 billion baht, up 12.7%.

Recognizing Thailand’s Stagflation Risks

Thailand’s economy shows signs that stagflation may occur, especially with low GDP growth but persistent inflation, reducing consumers’ purchasing power.

If monetary policy remains tight and fiscal support diminishes, Thailand will face challenges balancing inflation control and economic growth.

Thailand’s Inflation History: Lessons from the Past

Looking back, Thailand has experienced extremely high inflation:

• 1974: Surged to 24.3% due to the Arab-Israeli war and oil price spikes
• 1998: After the 1997 financial crisis, reached 7.89%
• 2022: Increased to 7.10% amid the Russia-Ukraine war

These historical events show that inflation often results from external shocks and energy price adjustments.

Summary: Balancing Inflation and Growth

Moderate inflation can stimulate economic growth, but excessive inflation or hyperinflation becomes an economic enemy.

Investors should understand that inflation presents both opportunities and risks. Careful planning, asset selection, and continuous economic monitoring are vital tools for survival and growth during inflation periods.

Ultimately, those who understand inflation and deflation have an advantage in building wealth, while others may remain confused.