Inflation and deflation: Differences and ways to adapt to overcome the economic crisis

Currently, as the global economy faces volatility, understanding inflation and deflation has become essential for investors and the general public. This article will discuss the causes, impacts, and investment strategies when confronting these economic conditions.

What exactly is inflation?

Inflation is not just about rising prices in a disorderly manner, but an economic condition where the price levels of goods and services tend to increase continuously due to various economic factors. Simply put, inflation causes the money we hold to lose value. For example, in the past, 50 baht could buy many bowls of rice, but now it only buys one. This is the impact of inflation on daily life.

Who benefits from inflation?

Those who benefit directly are private entrepreneurs, traders, and income earners who can raise prices according to market principles because they can increase their prices accordingly. However, salaried employees are at a disadvantage because their wages increase at a slower rate than the inflation rate.

What factors cause inflation?

Inflation can occur due to three main causes:

1. Demand-pull inflation (Demand Pull Inflation) After the global economy recovers from the pandemic, consumers, having been stuck at home, engage in “revenge spending,” causing demand for goods to surpass production capacity, leading to rising prices.

2. Cost-push inflation (Cost Push Inflation) Global commodity prices, such as natural gas, crude oil, steel, and copper, have surged due to production disruptions from major crises and the pandemic last year. Producers have to raise prices to cover increased costs. For example, crude oil prices rose from record lows in 2020 during lockdowns to record highs as countries reopened.

3. Excessive money printing by the government (Printing Money Inflation) When too much money circulates in the economy, it causes the currency to lose value, leading to inflation and economic instability.

Is stagflation approaching?

Thailand and the global economy are showing signs of stagflation — a situation with high inflation and high unemployment. This crisis is undesirable because it reduces purchasing power. Entrepreneurs struggle to sell, reduce prices, profit declines, layoffs increase, unemployment soars, and businesses eventually close. According to the latest IMF statistics in January 2024, the global economy is projected to grow by 3.1% in 2024 and 3.2% in 2025, which is lower than in the past, due to tight monetary policies, reduced financial support, and slow productivity growth.

How much does inflation affect us?

Impact on the public

• Rising cost of living: Prices of meat, vegetables, and oil have increased, straining wallets.
• Loss of purchasing power: Wages increase but not as fast as inflation, resulting in less real buying power.

Impact on businesses

• Decreased sales due to lower consumer spending.
• Increased production costs squeezing profits.
• Businesses delay investments and reduce staff.

Impact on the economy

• Slower productivity development.
• Speculation in high-risk assets, creating bubbles.
• Rising household debt.

Example from Thai inflation data

In 1974, Thailand experienced inflation at 24.3% due to the Israel-Arab war. After the economic crisis in 1997, when the baht depreciated, inflation reached 7.89%. As of May 2022, it was 7.10%, influenced by the Russia-Ukraine war.

The price tables from 2021-2024 show that prices of various goods have indeed increased:

How is inflation rate measured?

The Bank of Thailand uses the Consumer Price Index (CPI) to measure inflation. The Ministry of Commerce collects prices of 430 goods and services monthly. The CPI figure compared to the previous year indicates the inflation rate.

As of January 2024, the CPI was 110.3, an increase of 0.3% from the previous year (Base year 2019 = 100), and the inflation rate decreased to 1.11% YoY, the lowest in 35 months, due to falling energy and fresh goods prices.

Deflation: the opposite of inflation

Deflation (Deflation) is a condition where prices of goods and services decrease continuously, caused by reduced demand or insufficient money in the system. A deflationary economy can result from excess supply or economic recession.

Moderate inflation supports economic growth, but hyperinflation (Hyper Inflation) and deflation are both dangerous for the economy.

Real example: PTT profits from inflation

A clear example is PTT Public Company Limited. In the first half of 2022, when oil prices surged, the company and its affiliates earned 1,685,419 million THB with a net profit of 64,419 million THB, growing 12.7% YoY. About 24% of the profit came from PTT itself, with the rest from its subsidiaries.

Strategies to adapt during inflation

( 1. Reasonable investment planning

During inflation, deposit interest rates are low, so invest in assets with higher returns, such as stocks, funds, or real estate.

) 2. Avoid unnecessary debt

Control spending, reduce unnecessary purchases, and plan financial management strictly.

( 3. Invest in stable assets

Gold is a good choice because its value does not depreciate and tends to rise with inflation.

) 4. Follow economic news

Inflation affects everyone’s finances; staying informed helps prepare for it.

What should we invest in during inflation?

Bank stocks

Banks benefit when interest rates rise, as the net interest margin ###NIM### widens, increasing profits.

Insurance stocks

Insurance companies invest in government bonds, which yield higher returns as inflation increases.

Food sector stocks

Essential goods producers can raise prices, benefiting from inflation.

( Gold Gold prices move in the same direction as inflation. It can be traded for profit through buying and selling or CFD trading to profit from upward and downward trends.

) Real estate Rental income tends to follow inflation and is less affected by stock market volatility.

Floating Rate Bonds or Inflation-Linked Bonds

These adjust interest rates according to inflation. Choose credible bonds.

Summary

Inflation results from increased demand, insufficient supply, or higher production costs, causing prices to rise and money to lose value. Some benefit, like entrepreneurs and investors, while salaried workers may suffer. Moderate inflation supports economic growth, but hyperinflation ###Hyper Inflation### or deflation are equally dangerous.

Investors should adapt by investing in assets that benefit from current economic conditions, plan their finances carefully, and closely follow news, as inflation can change with global circumstances, requiring everyone to be prepared to navigate economic crises effectively.