Inflation and deflation: What are the differences and how should you adapt?

In this era, resources are increasingly scarce. The demand for goods is soaring, but production cannot keep up with the demand. This is the main reason why we are facing a rapidly changing economy. This issue impacts everyone’s livelihood, investments, and financial planning. This article will delve into the causes and solutions so investors can make informed decisions.

Inflation: From Theory to Real Life

The true meaning

Inflation is a condition where the prices of goods and services continuously rise according to the economic cycle, or from another perspective, the value of money decreases. The result is: with the same amount of money, you can buy fewer items.

Simple example: Mr. A has 50 baht. Last year, he could buy 5 plates of rice, but today, with the same amount of money, he can only buy 2 plates because rice prices have increased. This is everyday inflation.

Why does inflation occur?

Inflation arises from three main factors:

1. Demand Pull Inflation (Demand-pull inflation)

When the economy recovers after a recession, people gain confidence and their purchasing power increases. They start doing “revenge spending” — spending a lot of accumulated demand in a single day. However, factories have not yet increased production to meet this demand. The result: sellers raise prices.

2. Cost Push Inflation (Cost-push inflation)

Production costs rise — whether raw materials, fuel (crude oil, natural gas), or wages. When costs are high, producers must increase prices to maintain profits.

3. Printing Money Inflation (Money printing inflation)

When the government prints too much money beyond the market’s supply of goods, the money supply grows while goods do not, leading to a decrease in money’s value.

Current situation: When inflation sweeps the world

Currently, global inflation results from a combination of all three causes:

• Volatile recovery: The global economy tries to recover from COVID-19 but faces issues like geopolitical tensions (such as the Russia-Ukraine war)

• Supply chain constraints (Supply Chain Crisis): Container shortages, chip shortages, factory shutdowns, leading to product shortages.

• Rising energy prices: Oil prices from record lows in 2020 (the lockdown era) surged to record highs in 2021-2022 as countries reopened.

• Massive economic stimulus in many countries: Increasing the money supply in the system.

Actual Data from Thailand

Consumer Price Index (CPI) Changes

The Ministry of Commerce monitors prices of 430 items monthly. The result is the Consumer Price Index: (CPI)

Latest data (January 2024):

• CPI at 110.3 (Base 2562 = 100)
• YoY inflation rate (YoY) is 1.11%, down from last year
• The lowest in 35 months

How much have essential goods prices increased?

Let’s look at daily life items and their price changes:

It’s clear that 2022 was the year with the highest price surge, especially chili (quadrupled in price!) and meat prices dominated the market.

Who Benefits and Who Loses from Inflation

Who benefits from inflation

✅ Business owners and entrepreneurs - Can raise prices on goods and services, making profits ✅ Shareholders of energy companies - PTT in 2022 reported net profit of 64,419 million THB, up 12.7% from the previous year ✅ Bankers - When interest rates rise, banks increase lending rates, boosting profits ✅ Borrowers - Those who borrow money will find their debt more manageable at the end of the month compared to the next month

Who suffers from inflation

❌ Fixed-income earners - Salary increases by 3%, but inflation is 7% = losing purchasing power ❌ Cash savers - The value of their savings diminishes daily ❌ Debtors - Lenders who have fixed interest loans will face real losses ❌ Poor and low-income groups - Living costs rise, but income does not keep pace

How does inflation affect daily life?

Impact on citizens

Rapid rise in living costs - Prices go up, money’s value drops, purchasing power declines, people must choose carefully what to buy

Savings shrink - People shift from cash savings to investments (which carry risks) to combat value loss

Impact on businesses

Decreased sales afterward - Price hikes lead to reduced demand; some shops see sales drop 20-30% after raising prices

Profit shrinkage - Higher costs and lower sales reduce profits; some businesses with high debt are forced to lay off staff

Impact on the country

Economic slowdown - Major businesses cut investments and hiring, unemployment rises, GDP growth slows

Stagflation creeping in - High prices but stagnant economy; a situation that is difficult to control (Thailand has not yet reached this level)

Household debt increases - People borrow to cope with rising living costs, leading to high debt accumulation

Deflation (Deflation): Another enemy

What is deflation?

Deflation is the opposite situation — prices continuously fall, caused by low demand or insufficient money supply in the system.

Which is worse: inflation or deflation?

In reality, both excessive inflation and severe deflation are harmful to a country.

How to cope with inflation: Practical approaches

1. Develop strategic investment plans

When deposit interest rates are low, invest in higher-yield assets:

Options:

• Stocks and mutual funds
• Real estate
• Gold (as a hedge)
• Floating-rate bonds

2. Avoid “June” debt

Debt that does not generate income — such as unnecessary purchases or borrowing for consumption — is a self-inflicted wound.

Set:

• Tight budgets
• Eliminate unnecessary expenses
• Seek additional income sources

3. Invest in hedging assets

Gold, real money, and assets with intrinsic value — these are safe havens when inflation rises sharply.

4. Stay closely updated with news

Monitor policies of the Bank of Thailand, interest rate changes, and credit card policies — these are indicators of economic shifts.

What to invest in during inflation

Option 1: High-interest savings accounts

Many banks offer fixed deposits for 12-36 months with high interest, but funds are locked in.

Pros: Safe, higher interest than savings accounts Cons: Returns may not keep pace with actual inflation

Option 2: Invest in stocks (wisely select sectors)

During high inflation, certain sectors perform well:

Bank stocks - Rising interest rates → higher profits Insurance stocks - Investing in bonds with high yields Energy stocks - Oil and gas prices soar → profits surge Food stocks - People need to eat → pricing power increases

Option 3: Real estate

Rental income moves with inflation, less volatile than stocks. If you have sufficient capital, this is a good long-term investment.

Option 4: Gold

An asset with minimal supply, gold prices tend to rise with inflation.

Advanced technique: Trade CFD gold — profit from both rising and falling prices without owning physical gold (high risk, study before investing)

Option 5: Floating-rate bonds

Bonds with interest rates adjusted according to inflation and market rates.

Advantages: Hedge against inflation, yields increase when inflation rises Disadvantages: Need to assess issuer’s creditworthiness

Global economic outlook: Looking ahead

IMF forecast (January 2024)

• Global economy is expected to grow moderately at 3.1% in 2024 and 3.2% in 2025
• Challenges: Tight monetary policies, reduced financial support, slow productivity growth
• Positive signs: Inflation is decreasing worldwide
• Risks: Geopolitical tensions, supply disruptions

Thailand’s situation: Not yet in stagflation

Although inflation remains at 1.11% (below target), Thailand’s economy is not always strong. Continued monitoring is necessary.

Thailand’s inflation history: Lessons from the past

• 1974: Inflation exceeded 24.3% due to Middle East oil crisis (oil prices surged)
• 1980s: High inflation from Iran-Iraq war
• 1998: After the economic crisis, the baht depreciated, inflation hit 7.89%
• 2008: Inflation dropped to 5.51%
• 2022: Stabilized around 5%, recently at 7.10% (Russia-Ukraine war)

Historical events, natural factors, and conflicts all drive inflation.

Summary

Inflation is an unavoidable economic phenomenon but manageable.

You should: ✓ Understand causes and impacts ✓ Choose hedging assets (gold, property) ✓ Avoid cash holdings without strategy ✓ Follow economic news ✓ Invest in sectors that benefit

Knowledge + preparation = winning in the economic game. Smart investors know that inflation is not a monster to fear but an opportunity to plan finances better.