What is deflation (Deflation)? Understand the economic condition opposite to inflation.

When prices fall… will people buy or wait?

Prices of goods continue to decrease steadily. Sounds good, right? But it’s a sign of an economic crisis. This phenomenon is called deflation – the opposite of inflation, which makes consumers hesitant after purchasing because next time, prices might be even lower.

During the COVID-19 crisis, Thailand’s consumer price index dropped by 2.99% (YoY) – the sharpest decline in over 10 years. This is a clear example of tangible deflation.

What exactly is deflation?

Deflation is a condition where the overall level of prices for goods and services decreases continuously. When this happens, the “real” money increases in value – with the same amount of money, we can buy more.

But who would believe that this is a disastrous period in economic history?

Deflation is not just about some goods but a widespread decrease across the market. In April 2020, Thailand’s economic indicators were as follows:

• General Consumer Price Index (Headline CPI): -2.03% MoM, -2.99% YoY
• Producer Price Index (PPI): -1.7% MoM, -4.3% YoY
• Construction Material Price Index (CMI): -1.0% MoM, -4.0% YoY

What causes deflation? 5 reasons you need to know

1. Imbalance between demand and supply

Demand decreases: When people are reluctant to spend due to rising debt, reduced income, or fear of unemployment, their desire to buy goods drops. Producers cut back on production, leading to lower prices to attract buyers.

Supply increases: Sometimes, new technology reduces production costs. Producers increase supply, causing prices to fall further.

2. Faulty government monetary policies

Raising interest rates too high makes banks reluctant to lend. Credit becomes tight, liquidity shrinks, and the economy gets squeezed.

3. Excessive capital outflows abroad

Both illegal and legal capital outflows reduce funds in the system. Interest rates plummet, and investment declines.

4. Insufficient money circulation

Sometimes, people prefer to save (uncertainty) rather than spend. Money stored away reduces liquidity in the economy, leading to a slowdown.

5. Technological advancements

New technology lowers production costs. Producers can sell at lower prices – this is “good” deflation. But if it coincides with decreased demand, it can turn into a disaster.

Recession + deflation = where is the growth?

“GDP declines for two consecutive quarters” = recession. When this occurs:

• People’s incomes decrease
• Spending drops
• Businesses see declining sales
• Companies lay off workers / cut wages
• Money circulation in the economy stalls
• Excess stock remains; sellers rush to discount
• Consumers expect prices to fall further and stop buying
• A deflationary spiral occurs, with no one stopping it…

When the global Leading Economic Index (LEI) continues to decline, economic forecasts for 2023 indicate a risk of recession, especially with the Russia-Ukraine war, energy crises, and rising living costs.

Who benefits, who loses?

( Winners:

• Salaried workers: Same income, lower prices, higher purchasing power
• Creditors: Debtors repay with more valuable money
• Cash holders: Money remains, but its value increases

) Losers:

• Merchants / Entrepreneurs: Must lower prices, cut costs, reduce staff
• Shareholders: Business profits decline, stock prices fall
• Debtors: Repay loans with more valuable money, increasing debt burden
• Workers: Unemployment rises, wages decrease

Is Thailand truly in deflation?

According to the 4 criteria of the Bank of Thailand, Thailand has not fully entered deflation:

1. ❌ Continuous price decrease: Latest BOTh data estimates prices will rise from -1.7% (in 2020) to 0.9% ###in 2021###
2. ❌ Price dispersion across goods: 70% of goods have stable or rising prices
3. ❌ Lowest inflation forecast: 1.8% over the next 5 years, still within 1-3%
4. ⚠️ Ongoing monitoring: Economy and employment remain volatile

But risks remain: If the global economy contracts more than expected, Thailand could enter deflation.

“The Great Depression” – lessons from history

In 1929, the US stock market crashed hard (Black Tuesday). The impacts included:

• GDP shrank by 15% between 1929-1932
• International trade dropped by 50%
• US unemployment soared to 23%
• Some countries up to 33%
• Crop prices fell below 60%
• The effects lasted until World War II

From this, we see clearly: Deflation is no joke.

Government measures to combat deflation

If deflation truly occurs, the government must:

• Lower interest rates to make borrowing easier
• Increase liquidity via asset or bond purchases
• Reduce taxes to boost household spending
• Lower utility costs to ease household burdens
• Support public and private investment to create jobs
• Buy government bonds to circulate money in the system

What to invest in during deflation? 5 options

( 1. Cash )Cash is King( Cash increases in value during deflation. Suitable for future savings; some wait for the right moment to see problems emerge.

) 2. Bonds (Bonds) When the government lowers interest rates, existing bonds increase in value. ###Fixed returns but stronger assets(. Choose reputable companies to avoid default risk.

) 3. Defensive stocks ###Defensive Stocks( Invest in companies selling food, beverages, medicines, packaging – essentials that people buy even during crises. Their performance may outperform the market.

Tip: Pick stocks essential in daily life with consistent dividends.

) 4. Gold (Gold) Gold prices tend to rise during economic crises, serving as a good risk diversifier.

Modern gold investing: CFD trading ###Contracts for Difference( via trading platforms allows speculation on both rising and falling prices without owning physical gold.

) 5. Real estate ###Real Estate( During crises, property prices drop significantly. Sellers rush to convert to cash. Those with spare funds can find good deals to hold for resale or rent.

Investing in Short or Put Derivatives in the stock market

If stocks decline, experienced investors can:

• Short sell )Short Selling(: Borrow stocks to sell, then buy back at lower prices to return
• Buy Put options: The right to sell assets at a predetermined price, protecting profits when the market drops

Caution: These methods carry high risk; study thoroughly.

Investment strategies in a declining market

1. Scale in gradually: Don’t buy everything at once. Buy in phases; add more as prices fall.
2. Divide profits / cut losses: Manage risk fairly.
3. Choose stronger stocks: Companies capable of generating income even in downturns.
4. Research performance: Stocks still profitable during downturns will reflect true value when the market stabilizes.

Summary: You must understand deflation

Simple truth: Deflation is worse than it appears because, once it sets in, it creates a vicious cycle that’s hard to break—unemployment, fear, halted spending—all interconnected like a chain.

But good news: For savvy investors aware of key points and forecasts, crises are opportunities to buy at low prices for higher future returns.

Key words: Financial planning, research, cautious decision-making