Inflation vs. Deflation: What Are the Key Differences for Investors

When it comes to the economy, the term inflation often appears in the news. But honestly, most people still don’t fully understand how it impacts our wallets. This article will discuss inflation from the basics, causes, and appropriate ways to cope.

What is inflation? Understand it simply

Inflation in economics refers to a continuous rise in the prices of goods and services. To put it simply, it means our money buys less each day.

A clear example

Mr. A has 50 baht to buy rice. Five years ago, that was enough for 5 plates, but today only 1 plate. Why is that? The simple answer is because rice prices have increased, which is exactly what inflation does.

Not just rice—everything’s prices go up, including oil, eggs, vegetables, meat, transportation costs—all related to inflation.

What causes inflation?

The three main causes of inflation

1. Demand-pull inflation (Demand Pull Inflation)
When the economy recovers, people have more money to spend and want to buy more goods and services. But producers can’t supply enough, so sellers raise prices.

2. Cost-push inflation (Cost Push Inflation)
Global raw material prices, such as crude oil, natural gas, steel, copper, increase. Producers then raise their prices to maintain profits.

3. Money printing by the government (Printing Money Inflation)
When the government injects more money into the economy, the money supply increases while goods remain the same, leading to heavier inflation.

Currently, what causes global inflation?

Today, the world faces a mixed form of inflation, such as:

• Rapid global economic recovery after COVID-19, with people rushing to buy things (revenge spending), leading to demand-pull inflation.
• Supply chain issues (Supply Chain): shortages of containers and semiconductors increase costs, causing producer inflation.
• Skyrocketing energy prices: crude oil and gas prices have multiplied due to geopolitical issues and production restrictions.
• Loose monetary policies: central banks keep interest rates low to stimulate the economy, increasing the money supply.

According to IMF data in January 2567 (2024), the global economy is expected to grow at 3.1%, still below the historical average due to tight monetary policies.

Who benefits and who suffers from inflation

Beneficiaries

✅ Entrepreneurs, traders, shareholders

• Can raise prices of goods and services at or above the inflation rate
• Business growth, increased employment, higher income

✅ Debtors

• When inflation occurs, the real value of debt decreases (debtors’ advantage)

✅ Bank owners, insurance companies

• Increased interest margins lead to higher profits

Those who lose

❌ Salaried employees

• Salary increases are slow and below inflation, reducing real income

❌ Money savers, consumers

• Reduced purchasing power, higher prices make life harder

❌ Creditors

• The money lent out loses value

Effects of inflation on the economy and ordinary people

On the public

• Cost of living rises: tomorrow, you can buy less with the same money
• Salaries/income lag behind: increases are slow and small
• Savings lose value: money stored depreciates unless invested

On businesses

• Sales fluctuate: higher prices may reduce demand
• Production slows: high costs, lower profits, even with price cuts
• Unemployment: businesses don’t expand, lay off workers

On the country

• Economic slowdown: GDP growth decreases
• Increased risks: financial system imbalance, asset bubbles

In case of stagflation (inflation + recession)

This is an undesirable scenario: high prices, declining economy, high unemployment, poverty, goods priced but not purchased.

Thai inflation over the past 50 years

Looking back, Thailand has experienced severe inflation before:

• 2517 (1974): over 24.3%, due to Israel-Arab war, oil prices exploded
• 2523 (1980): 15%, due to Iran-Iraq war
• 2541 (1998): 7.89%, after the 1997 economic crisis, baht devalued
• 2551 (2008): 5.51%, general inflation
• 2565 (2022): 7.10%, due to Russia-Ukraine war

CPI data for January 2567 (2024):

• Consumer Price Index: 110.3 (up 0.3% YoY)
• General inflation: 1.11% (decreasing for 4 months)
• CPI MoM: +0.02% (from previous month)

Factors reducing inflation: falling energy prices and increased fresh vegetable supplies.

Meat and vegetable prices fluctuate widely

Inflation vs. Deflation: What’s the difference?

If inflation is rising prices, then deflation (Deflation) is the opposite: prices fall.

Deflation occurs when:

• Demand decreases; people buy less
• Money supply in the system is insufficient
• Producers lower prices to sell

Problems of deflation:

• People wait for prices to drop, don’t buy now → sales decline
• Businesses earn less → lower prices further → economic downturn
• High unemployment, poverty

Both inflation and deflation are undesirable extremes; balance is needed.

How to invest during inflation

Coping strategies

1. Avoid bad debt
In inflation periods, borrowing that isn’t invested profitably leads to losses. The borrowed amount, over 5 years, becomes worth less as inflation rises.

2. Plan investments wisely

• Saving accounts earn less than inflation → loss
• Invest in stocks, funds, real estate → higher returns

3. Invest in stable assets

Gold

• Moves in tandem with inflation
• When inflation is high, gold prices rise
• Long-term, it’s safe and non-depreciating

Beneficial stocks

Bank stocks

• Interest rates rise → profit margins increase
• Borrowers pay more → higher profits

Insurance stocks

• Invest in bonds with low coupons
• When inflation rises, central banks raise interest rates
• New bonds have higher coupons → insurance stocks rise

Food stocks

• Food is essential; people must eat
• Can set higher margins
• During inflation, reduce quantity but increase margins

Energy stocks

• Example: PTT H1 2565 (2022) net profit 64,419 million THB, up 12.7%
• Due to high oil prices, sales increase

Inflation-linked bonds

• Floating Rate Bonds → interest adjusts with benchmark rate
• Inflation-Linked Bonds → coupons adjust with inflation rate
• Study ratings carefully before buying

Real estate funds

• Rental income linked to inflation
• Not volatile like stocks
• Suitable for long-term investment

Monitoring data

Every month, the Ministry of Commerce collects prices of 430 items to calculate the Consumer Price Index (CPI). If CPI increases YoY by more than 3-4%, beware of inflation. Over 10% indicates risk of Hyperinflation.

Summary

Inflation is a natural economic phenomenon, fluctuating with cycles. But if inflation exceeds certain limits, (Hyper Inflation), it becomes a crisis.

Key points:

• Moderate inflation is good; helps economic growth
• Severe inflation impoverishes people and stalls businesses
• Deflation is even worse; economic decline

How to adapt:

• Invest in high-yield assets
• Choose stocks benefiting from inflation
• Continuously monitor CPI data
• Avoid unnecessary debt

Investors should understand inflation to prevent losses and to capitalize on its opportunities.