Inflation vs. Deflation: Investors Need to Know the Differences and How to Respond Correctly

When it comes to financial management, understanding inflation and deflation is crucial because both economic conditions directly impact our investment strategies and financial planning.

Inflation: A Complete Guide for Investors

Inflation occurs when the prices of goods and services tend to rise continuously. When prices increase, it means that the value of money in our hands decreases, resulting in the same amount of money buying fewer goods.

For example, if you used to buy rice for 50 baht and could get several plates, now the same amount of money only buys one plate. This is the effect of inflation causing prices to rise steadily.

Deflation: The Contradiction of Inflation

Deflation is the opposite situation, where the prices of goods and services decrease continuously. The problem is reduced demand and insufficient money circulation in the economy.

Deflation leads producers to reduce production and employment, and ultimately the economy stagnates. Both inflation and deflation have negative effects if they persist for a long time.

Causes of Inflation: More Than You Think

The main causes of inflation are threefold:

1. Demand Pull Inflation - Increased demand but insufficient supply, leading sellers to raise prices.

2. Cost Push Inflation - Rising production costs, such as crude oil prices, natural gas, and semiconductor chips, forcing producers to pass costs to consumers.

3. Printing Money Inflation - The government prints large amounts of money, leading to excess money supply in the system.

Currently, inflation worldwide results from multiple factors: the global economic recovery slowed by COVID-19, pent-up consumer demand (revenge spending), high energy costs, transportation issues, and shortages of various goods.

How to Measure Inflation: CPI as an Indicator

Every month, the Thai Ministry of Commerce collects prices of 430 items to calculate the Consumer Price Index (CPI). Changes in CPI compared to the previous year represent the general inflation rate.

As of January 2567 (2024), CPI was 110.3, up 0.3% from the previous year. The overall inflation rate decreased to 1.11% per year — the lowest in 35 months, due to falling energy and fresh food prices.

Who Benefits from Inflation?

Entrepreneurs - Can raise prices according to inflation, increasing profits.

Lenders - When inflation is high, the money repaid by borrowers is worth less.

Shareholders - Companies can generate higher profits from price increases.

Real-world example: PTT Public Company Limited in the first half of 2565 (2022) reported a net profit of 64,419 million baht, a 12.7% increase year-over-year, due to soaring oil prices.

Those at a disadvantage - Salaried employees, because their salary increases are lower than inflation. People holding cash will see their purchasing power decline.

Impact of Inflation on Daily Life

Prices of essential goods such as meat, vegetables, eggs, and oil have changed significantly over the years:

• Red pork: 137.5 baht/kg (2564) → 205 baht/kg (2565) → 133.31 baht/kg (2567)
• Diesel oil: 28.29 baht/liter (2564) → 40.24 baht/liter (2567)
• Gasohol: 28.75 baht/liter (2564) → 39.15 baht/liter (2567)
• Chili peppers: 45 baht/kg (2564) → 250 baht/kg (2566)

Higher living costs mean reduced purchasing power, leaving less money for other expenses.

Investment Strategies During Inflation

( Invest in Beneficial Sectors

Bank stocks - Profit from net interest margin; as interest rates rise, profits increase.

Insurance stocks - Invest in bonds that yield returns linked to inflation.

Food stocks - Essential goods that consumers must buy regardless of price; companies can raise prices.

) Real estate

Rents tend to move with inflation, not as volatile as the stock market. If you have sufficient funds, purchasing real assets is a way to hedge against value erosion.

Gold

Gold moves in the same direction as inflation; the higher the inflation, the higher the gold price.

Inflation-linked bonds

Choose Floating Rate Bonds or Inflation-Linked Bonds that adjust interest rates according to inflation changes.

High-interest savings accounts

Term deposit accounts generally offer higher returns than regular savings accounts.

How to Cope with Inflation: A Prudent Financial Plan

1. Avoid debt that does not generate income - Reduce borrowing without purpose; think carefully before unnecessary purchases.

2. Follow economic news - Since inflation affects investments broadly, staying informed about economic trends is essential.

3. Diversify your investment portfolio - Invest in stocks, assets, gold, and bonds to spread risk.

4. Focus on real returns - Compare investment returns with inflation rates; if returns are lower, your money is still losing value.

Thailand’s Inflation History: Lessons from the Past

In 2517 (1974), Thailand experienced inflation of 24.3% due to the oil crisis from the Middle East conflict.

In 2523 (1980), inflation rose again because of the Iran-Iraq war.

In 2541 (1998), after the 1997 economic crisis, the baht depreciated, and inflation surged to 7.89%.

Since then, the Bank of Thailand has managed to keep inflation below 5% for extended periods.

In 2565 (2022), inflation spiked to 7.10% due to the Russia-Ukraine war and supply chain disruptions.

Stagflation: The Worst-Case Scenario

Stagflation = High inflation + Slow economic growth, which is bad for everyone.

When the purchasing power declines, consumers spend less, businesses cannot sell, and prices fall. Profits decrease, expansion halts, layoffs increase, unemployment rises, and GDP growth slows. This scenario is undesirable for all.

Currently, Thailand’s economy has not yet entered true stagflation, but ongoing monitoring is necessary.

Inflation vs. Deflation: Summary of Differences

IMF’s Outlook on the Global Economy

As of January 2567 (2024), IMF reports:

• Global economy expected to grow 3.1% in 2567 (2024) and 3.2% in 2568 (2025).
• Growth remains below historical averages due to tight monetary policies, reduced support, and low productivity.
• Inflation is decreasing worldwide, but risks remain from geopolitical tensions and supply disruptions.
• Policymakers must balance inflation control with preventing growth slowdown.

Conclusion: In the Inflation Era, Know How to Invest in Stocks, Assets, and Gold

Inflation is not necessarily bad if kept at moderate levels. The economy grows, people are employed, and money circulates. But if inflation spirals out of control or leads to Stagflation, it becomes dangerous.

The key to surviving inflation is not letting your money sit idle; instead, invest to earn returns exceeding inflation. Beneficial sectors include stocks, assets, gold, and inflation-adjusted bonds.

Stay informed about economic news, plan your finances, and diversify investments — this is the smart investor’s way to handle inflation and deflation appropriately.