Varun , Sunny & Duan

1. Varun, Sunny & Duan

2. INFLATION Inflation is the term used to describe a rise of average prices through the economy. It means that money is losing its value. Basically, the rate at which the general level of prices for goods and services is rising and subsequently the purchasing power is falling.

3. Causes of Inflation • (Cost-push inflation): A rise in production costs, which leads to an increase in the price of the final product. For example, if raw materials increase in price, this leads to the cost of production increasing, which in turn leads to the company increasing prices to maintain steady profits. Rising labor costs can also lead to inflation. As workers demand wage increases, companies usually chose to pass on those costs to their customers.

4. (Demand-pull inflation): Inflation can happen when governments print an excess of money to deal with a crisis. As a result, prices end up rising at an extremely high speed to keep up with the currency surplus. This is called the demand-pull, in which prices are forced upwards because of a high demand. - Demand-pull inflation is often described by many sources as "too much money chasing too few goods,"

5. Forecast • Due to rising oil and food prices, the annual inflation rate for 2010 shot up to 3.5% in July, but it will unlikely reach higher rates as oil and food prices are stabilizing and Thailand is receiving high foreign reserves and capital investment.

6. Effects Inflation can be very damaging for a number of reasons. • First, people may be left worse off if prices rise faster than their incomes. • Second, inflation can reduce the value of an investment if the returns prove insufficient to compensate them for inflation. • Third, since inflation often go hand in hand with an overheated economy, they can accentuate boom-bust cycles in the economy.

7. Positive Effect • Generally, if you have a lot of debt, inflation works for you by decreasing the relative size of that debt.  If you have a lot of assets, inflation works in the opposite by decreasing the value of those assets.  $1,000,000 50 years ago is not the same as $1,000,000 today because of inflation. • It might relatively benefit borrowers who will have to pay the same amount of money they borrowed (+ fixed interests), but the inflation could be higher than the interests , therefore they will be paying less money back. Example : you borrowed $1000 in 2005with a 5% fixed interest rate and you paid it back in full in 2007, let’s suppose the inflation rate for 2005, 2006 and 2007 has been 15%, you were charged %5 of interests, but in reality, you were earning %10 of interests, because 15% (inflation rate) ± 5%(interests) = %10 profit, which means you have paid only 70% of the real value in the 3years.

8. Negative Effect • High or unpredictable inflation rates are regarded as harmful to an overall economy. They add inefficiencies in the market, and make it difficult for companies to budget or plan long-term. • Inflation can act as a drag on productivity as companies are forced to shift resources away from products and services in order to focus on profit and losses from currency inflation. • When fixed exchange rates are imposed, higher inflation in one economy than another will cause the first economy's exports to become more expensive and affect the balance of trade. There can also be negative impacts to trade from an increased instability in currency exchange prices caused by unpredictable inflation.

9. In Thailand • Currently in Thailand, the banks have raised the interest rate in effort to control inflation occurring in the country.

10. What can be done ? Control the following rules and policy: • Monetary policy • Fixed exchange rates • Gold standard • Wage and price controls

11. Monetary policy: High interest rates and slow growth of the money supply are the traditional ways through which central banks fight or prevent inflation, though they have different approaches.  • Fixed exchange rates: A fixed exchange rate is usually used to stabilize the value of a currency, vis-a-vis the currency it is pegged to. It can also be used as a means to control inflation. However, as the value of the reference currency rises and falls, so does the currency pegged to it. This essentially means that the inflation rate in the fixed exchange rate country is determined by the inflation rate of the country the currency is pegged to. • Gold standard: Under a gold standard, the long term rate of inflation (or deflation) would be determined by the growth rate of the supply of gold relative to total output

12. Wage and price controls: In general wage and price controls are regarded as a temporary and exceptional measure, only effective when coupled with policies designed to reduce the underlying causes of inflation during the wage and price control regime . - Artificially low prices often cause rationing and shortages and discourage future investment, resulting in yet further shortages.

13. How to Survive Inflation? • Be careful when buying bonds, high inflation rates completely destroy the value of long-term bonds • Invest in durable goods or commodities rather than in money. • Invest for long-term capital gains, because short term investments tend to give deceptive results or sense of making profits while in reality you are not making profits. • Use the money saving tips such as: you need to reduce your consumption of things that are rising rapidly in price (eg, gas) without having to reduce your consumption of goods that are rising less rapidly or even falling in price (eg, clothes). • Manage wisely your recurring monthly bills such as (phone bills, cable TV...), it would help to reduce them or eliminate some of them. • Ask yourself, do I really need these things I’m spending my money on? Think how much and how often you will need something before buying it • Buy only what you need, especially objects that have multi-tasks, and are considered durable goods. • You don’t have to live cheap, just live smart!

14. References • http://www.tradingeconomics.com/thailand/inflation-cpi • http://en.wikipedia.org/wiki/Economy_of_Thailand