Inflation is coming. What should investors do to protect their investments?

In this era, many people may wonder: What is (Inflation)? How does it occur, and how does it impact our finances? This article will provide all the answers, along with investment tips to ensure your purchasing power isn’t eroded by changing economic conditions.

Inflation is a prolonged increase in prices

Imagine this: in the past, 50 baht could buy several plates of rice, but today, with the same amount of money, you can only buy one plate. That is inflation — a phenomenon where the prices of goods and services increase continuously.

From the perspective of currency value, inflation means the value of money decreases, requiring more money today to buy the same items.

In the coming decades, rice prices may rise to 100 baht per plate. Clearly, inflation is significant for investors when making stock market investment decisions.

Who benefits from inflation, and who is at a disadvantage

Beneficiaries:

• Merchants and small business owners, as they can raise prices according to market conditions
• Shareholders, bankers, and (borrowers) (debtors)

Disadvantaged:

• Salaried employees — even if salaries increase, they often lag behind inflation rates
• Creditors and cash holders

Causes of inflation

1. Increased demand for goods (Demand Pull Inflation)

As the economy recovers, consumers have more money to spend, but the supply of goods and services in the market is insufficient. Sellers raise prices accordingly.

2. Rising production costs (Cost Push Inflation)

Prices of oil, natural gas, metals, and commodities increase globally. Producers must raise their prices to cover higher costs.

3. Excessive money printing (Printing Money Inflation)

The government prints a large amount of money, leading to an imbalance in the money supply within the system.

Current factors driving higher inflation:

• Post-COVID-19 economic recovery creating a surge in demand (revenge spending)
• Supply chain disruptions (supply chain disruption) — shortages of containers, microchips
• Russia-Ukraine war affecting energy prices
• Geopolitical tensions

Stagflation: a situation where no one is comfortable

Thailand is currently facing the risk of Stagflation () — inflation with low GDP growth. When consumers have less purchasing power, businesses cannot sell their products, leading to price cuts, reduced profits, decreased investments, layoffs, and even closures.

The result: low GDP growth and high unemployment — an undesirable scenario.

However, Thailand’s economy has not yet been officially classified as stagflation, but monitoring economic news is essential.

Inflation index (CPI) reported monthly

Every month, the Ministry of Commerce collects data on 430 items to calculate the Consumer Price Index (CPI). An increase in CPI year-over-year equals the inflation rate.

As of January 2024:

• CPI = 110.3, up 0.3% from the previous year
• YoY inflation rate = 1.11% (decreasing continuously)
• MoM CPI = 0.02% (compared to the previous month)

The decrease is due to lower energy, fresh food, vegetables, and meat prices, while fuel, electricity, and transportation costs increased.

Track daily price changes of everyday items

Prices fluctuate—some rise significantly, others fall—but overall, the cost of living continues to increase.

Inflation and deflation: the opposite enemies of the economy

Inflation = rising prices of goods

Deflation = falling prices of goods

Both are caused by economic cycles. However, if both are severe and prolonged, they can harm economic growth and people’s lives equally.

Who does inflation affect?

General public:

Higher living costs, reduced purchasing power, less money

Businesses:

Higher prices, lower sales, increased costs, risk of layoffs

Country overall:

Slower development of productive capacity. If interest rates turn negative, people may invest in risky assets, creating bubbles in markets.

How to adapt when inflation is coming

1. Plan your investments wisely

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

2. Avoid bad debt

Reduce unnecessary purchases and plan expenses carefully.

3. Invest in stable assets

Gold, as it retains intrinsic value and does not depreciate over time.

4. Follow economic news closely

Information is the best weapon to prepare and respond to changing conditions.

What investments are good during inflation?

High-interest savings accounts

Choose fixed deposit accounts for 12-36 months offering higher interest than regular savings.

Real estate funds

Rental income tends to increase with inflation, so they are less affected. Plus, they offer dividends and significant capital gains.

Floating rate bonds

Opt for Floating Rate Bonds or Inflation-Linked Bonds that adjust interest payments based on interest rates and inflation changes.

Gold: a premium hedge

Gold prices move with inflation; the higher the inflation, the more expensive gold becomes. Trading CFD gold allows you to speculate both upward and downward without owning the physical asset.

Stocks benefiting from inflation

Bank stocks:

• Banks earn mainly from interest on loans
• When interest rates rise, bank profits increase
• Returns grow from the interest margin

Insurance stocks:

• Insurance companies hold large cash reserves invested in government bonds
• When inflation and interest rates rise, bond yields increase, boosting returns

Food stocks:

• Food is a necessity
• They have pricing power to set higher prices
• Benefit more from inflation than other industries

Summary

Inflation is a double-edged sword: it promotes economic expansion but makes daily life more expensive. However, smart investors can profit from this environment by investing in assets that benefit from inflation.

Most importantly: Stay informed to avoid missing out on inflation trends and develop appropriate investment strategies accordingly.