How does inflation affect your wallet? What are the causes?

If you’ve ever noticed that whenever inflation comes, the prices of everything keep rising, it means you’ve encountered an economic condition that directly affects your daily life. This article will help you understand the nature of this problem, and most importantly, how to protect your money from the erosive effects of inflation.

What is inflation and why does it relate to your money?

Inflation is not just an economic term studied in classrooms; it is a condition where the prices of goods and services continuously increase. Meanwhile, the value of the banknotes in your pocket decreases. According to economic science, if a house costs 100 baht many years ago, you could buy many items with it. But today, the same 100 baht buys fewer items. Prices of goods, meats, vegetables, and diesel oil all soar.

A clear example

Suppose you have 50 baht. In the past, you could buy several plates of rice. Today, you need to pay more to buy just one plate. If we project the trend over several decades, paying 100 baht per plate of rice is not unusual. Just imagine how much your money today will be worth in the future.

Where does inflation come from?

Studying the causes of inflation will help you understand why prices increase.

Increased demand for goods, but supply cannot keep up

As the world gradually recovers from economic recession, consumers have more demand for goods after staying home for a long time (Revenge Spending), especially those with substantial savings. But the problem is that production of goods and services cannot meet this demand, giving sellers the opportunity to raise prices without resistance.

Rising production costs

On the global market, prices of natural gas, crude oil, coal, iron, and copper have all surged, increasing production costs accordingly. Companies must decide whether to raise their product prices or reduce profit margins. Most choose the first option.

Transportation issues (Supply Chain Disruption)

Post-pandemic, there have been shortages of container ships and semiconductor chips, leading to higher transportation costs. Goods become scarce, and prices go up.

The government prints more money

Sometimes, inflation results from the government injecting too much money into the economy, causing the money supply to grow rapidly, which leads to severe inflation.

From an investor’s perspective, who does inflation affect?

Who benefits

• Entrepreneurs: Can raise prices of goods or services
• Shareholders: Companies increase profits, stock value rises
• Banks: Benefit from interest rate spreads
• Debtors: Repay loans with devalued money

Who is at a disadvantage

• Creditors: Receive money worth less
• Salaried employees: Wages do not increase at the same rate as inflation
• Consumers: The value of their money decreases continuously

How does inflation impact the economy and daily life?

Effects on the public

Living costs increase every month, reducing purchasing power. People need to manage their money more carefully.

Effects on businesses

Rising prices lead to lower sales. Production costs increase, profits shrink. Companies tend to delay investments and hiring.

Effects on the country

Unemployment rises, long-term economic development slows down. If inflation becomes so high that real interest rates turn negative, people may turn to risky assets, creating bubbles in the markets.

Effects on daily living

Meat, vegetables, oil, and eggs all become more expensive. Buying essentials for daily life becomes a heavier burden.

How much have current product prices changed?

Tracking the prices of finished goods shows that over four years, changes vary.

What does the Consumer Price Index (CPI) tell us?

Every month, the Ministry of Commerce collects data on 430 items of goods and services to calculate the (CPI).

Latest data for January 2024 shows:

• CPI = 110.3, up 0.3% from last year
• Overall inflation (YoY) = 1.11%, decreased from the previous year
• Energy prices have decreased due to government cost-reduction measures
• Fresh vegetables and meats continue to decline in price

How do inflation and deflation differ?

Deflation (Deflation) is the opposite: prices of goods and services decrease continuously. At first glance, it might seem good, but in reality, it’s worse than inflation because when prices fall, entrepreneurs stop investing, and consumers wait for further price drops. This leads to economic stagnation and higher unemployment.

Moderate inflation signals a growing economy, but if it becomes too high, it turns into Hyperinflation, a situation nobody wants to face.

When inflation occurs, what should you invest in?

Gold - assets that move in tandem with inflation

Gold prices tend to rise with inflation. Investing in gold long-term can protect your capital from erosion. Additionally, through various CFD trading options, you can speculate on both rising and falling prices.

Banking stocks

Banks profit from interest rate spreads. When central banks raise interest rates, bank stocks tend to increase in value.

Insurance stocks

Insurance companies invest premiums in government bonds. When bond yields rise, their profits increase.

Real estate funds

Rents are often set according to inflation, so if property prices increase, rents tend to follow.

Floating Rate Bonds

Adjust interest rates according to inflation levels, providing returns that track inflation.

Food stocks

Food is a necessity; demand remains steady. Food companies have pricing power.

Basic principles when inflation is coming

Plan your investments wisely

Deposit money in banks for low interest; invest in higher-yield assets like stocks, mutual funds, or real estate.

Avoid bad debt

Don’t take on debt without income. Reduce unnecessary purchases. Plan your spending carefully.

Invest in stable assets

Gold retains value and always holds its worth. It’s a good hedge to preserve your capital during inflation.

Keep up with news and information

Inflation affects every aspect of life. Stay informed to prepare accordingly.

Summary: Deep understanding of inflation

The causes of inflation stem from various factors: increased demand, high production costs, and soaring money supply—all leading to rising prices. Smart investors see opportunities in every economic condition. Although inflation is a challenge, with proper understanding and strategic investment planning, you can protect and grow your wealth.

Whether in the short or long term, or trading via Gate.io or other platforms, good decisions come from studying, following news, and consulting experts—leading to financial success.