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How to Prepare for an Inflationary Recession?

A recession looks inevitable, but the extent of it is still unknown. Learn about how you can best prepare for it, personally and financially .
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor


Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: April 15, 2024
The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor


Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
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Table Of Content

Although the pandemic and associated quarantine measures are beginning to ease, businesses must still prepare for the possibility of high inflation on the horizon. After a long period of decline, inflation has been on the rise in 2021-2022 and started to go down in 2023 due to the FED monetary tightening.

 Cars, both new and used, are becoming more expensive, as is the gasoline that powers them. And, yes, you can expect to pay more for your burger or burrito if you pull up to a drive-through. As the United States recovers from the pandemic recession, prices for a wide range of goods are rising.

The Impact of Inflationary Pressures

Inflationary pressures have a variety of economic consequences. First and foremost, it reduces purchasing power by increasing the cost of retail goods and services. It can also raise borrowing costs as interest rates rise due to increased risk. 

Inflationary pressures can also fuel additional inflation, creating a feedback loop. As people spend more quickly to reduce the time they spend holding depreciating currency, the supply of money exceeds the demand, causing the purchasing power of the currency to fall even faster.

However, not all of the consequences of inflation are bad. Inflation stimulates spending. When faced with the prospect of declining purchasing power, the typical reaction is to purchase now rather than wait. 

Because cash is likely to lose value, it is better to do your shopping now and stock up on items that will not lose value. As a result, consumers are more likely to stock their freezers, fill up their gas tanks, and stock up on new clothing for their growing children.

What Exactly is a Recession?

A recession is a business cycle contraction that occurs when there is a general decline in economic activity. Recessions typically occur when there is a significant decrease in spending (an adverse demand shock).

A financial crisis, an external trade shock, an adverse supply shock, the bursting of an economic bubble, or a large-scale anthropogenic or natural disaster may all trigger this (e.g. a pandemic). It is defined as “a significant decline in economic activity spread across the market, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales” in the United States.

In the United Kingdom, it is defined as two consecutive quarters of negative economic growth.

Do We See The End Of The Business Cycle?

The business cycle describes how an economy alternates between periods of expansion and periods of contraction. As an economic expansion begins, the economy experiences healthy, long-term growth. Lenders gradually make borrowing money easier and less expensive, encouraging consumers and businesses to pile up debt. Irrational exuberance begins to trump asset prices.

As the economic expansion progresses, asset values rise faster and debt loads grow larger. At some point during the cycle, one of the above-mentioned phenomena derail the economic expansion. The shock deflates asset bubbles, crashes the stock market, and makes those massive debt loads unsustainable. As a result, growth slows and the economy enters a slump. This business cycle is one of the longest in the history, mainly due to the massive money print done by the FED. The assets prices near all time high, and the inflation is here.

On the bottom line, although the United States might officially be in a recession, economists say it is far from the typical downturn that happens when a recession comes. At this moment  – no one knows exactly when will be the next recession, but it seems the conditions for recessions are almost here.

Do Interest Rates Rise in a Inflationary Recession?

At the beginning of a recession, you might see that interest rates fall. This encourages people to take out lending or loans. However, the credit requirements and borrowing requirements will be very strict, so you might not be able to qualify for lending unless you have stellar credit.

However, this can't be done in an inflationary recession, all the more so if the current interest rate is already very low.  One of the most common ways to fight against inflation is by interest rates increase.

Personal Preparation

The first thing to consider is how your personal circumstances may change as a result of a recession.

During a recession, you may lose your job as unemployment rises. Not only are you more likely to lose your current job, but it also becomes much more difficult to find a job replacement as more people lose their jobs. People who keep their jobs may see pay and benefit cuts, as well as difficulty negotiating future pay raises.

You will have to analyze your job and carry out a risk assessment. This will allow you to figure out how likely it may be that you will lose your job, have your hours cut or be subject to a decrease in pay.

Those In Employment

For those who have employers, it is a good idea to figure out what implications an extensive pandemic shutdown and subsequent recession would have on the core business.

Some of the important questions to ask yourself include:

  • Does the business have enough cash reserves to meet its obligations?
  • Will there still be sufficient demand for the product or service during a recession?
  • Is it likely that the business may look to cut hours or jobs?
  • How will the industry as a whole be affected?
  • Is your current job vital to the business or is it expendable?
  • What voluntary redundancy package would you be entitled to?

These are just some of the questions to ask yourself as they will give you a clearer idea of how a recession might impact your job. Resulting from the answers, you can start to develop a plan for the future.

You may look at other job opportunities in the same or a parallel field. There may be an opportunity for you to shift your focus to an industry that is less sensitive to a recession.

Those Who Are Self-Employed

If you are self-employed, then there will be a different set of questions that you will have to consider.

At the best of times, it can be stressful and uncertain when you work for yourself, doubly so if there is a recession on the horizon.

Some of the key questions to ask yourself in this case include:

  • Will there still be a demand for the goods or services you provide during a recession?
  • Will you be able to keep paying all your staff if a recession hits?
  • Is there a way you can pivot your business to make it less sensitive to a recession?
  • Is there a way to decrease the risks of your clients or customers not paying their obligations?
  • Would it make sense to seek employment instead of being self-employed during a recession?
  • Does your business have enough cash to meet its obligations in a recession?

These are just some of the questions to ask yourself if you are self-employed. If you have a family, your priority will most likely be to ensure that you can keep a roof over their heads and food on the table.

Oftentimes, a partner may have to go back to employment so there are two incomes coming into a household. Someone may have to take up a second job to supplement a potential loss in income from their business.

Those Who Are Unemployed

If you are currently unemployed, then there will be a lot of uncertainty that you have to deal with. It is important that you are availing of any unemployment benefits that you are entitled to.

You should also answer these questions:

  • What industries would be hiring during a recession that is relevant to your experience?
  • Can you upskill while looking for a new job?
  • Can you work part-time while you look for a new job?
  • How can you get your foot in the door in a certain company you want to work for?
  • Is it time to adjust your monthly budget or create one? 

Naturally, people will be in different situations when they are unemployed. Their spouse may be working or they may be the only breadwinner in a family. Alternatively, you could be living on your own and have to fend for yourself.

There are a lot of important questions to ask yourself. It is better to answer them well in advance instead of waiting for the worst eventualities to happen and not being properly prepared.

Preparing Financially

It is important that you prepare yourself as best as possible in a financial sense for an upcoming recession.

The best way to keep money safe during a recession is to start protecting it before a recession happens. You should always have an emergency fund available if you need it. Always live within your means. Even though you might have money now, you don’t want to overspend and then be in need later on.

Always have additional sources of income if possible and invest in any way you can for the long term. Keeping your credit score high will also ensure you can borrow money or get lending options if you need to during a recession.

While everyone's circumstances will be different, there are a few key tenets that people should adhere to in nearly all situations:

  • Emergency Fund – the first tenet is the importance of having an emergency fund. This is money you have set aside that you can use in times of emergency. If you end up losing your job, this will give you enough money to live on for a period of time without a job. As a general rule of thumb, you should aim to have at least six months' worth of living expenses in your emergency fund. It should be easily accessible and you should not touch it unless there is an emergency.
  • Minimizing Debt – The next step to preparing for a recession is to try to minimize your debt as much as possible. This means paying off credit cards, car loans and the likes. This will take some pressure off you if a recession begins and your paycheck starts to get squeezed.
  • Managing Your Mortgage – Finally, if you have a mortgage, you may be able to work with your mortgage provider to restructure your monthly payments. This could take some pressure off you if you are seriously struggling to meet repayments each month.

Financial institutions will usually work with you if you are making an effort to meet your debt obligations and your repayment track record to date has been good. The overriding principle when managing your finances in anticipation of a recession is to take a more conservative approach, with having easy access to funds if needed and having minimal debt.

Managing Retirement And Investment Accounts

For your retirement accounts, if there is a recession on the horizon, you may want to take a more conservative approach. This could see you moving away from volatile stocks and riskier types of investments.

Your age plays a factor, as people will tend to take a more conservative approach to investing as they get closer to retirement age. Younger people can afford to ride out bouts of volatility as they have a long way to go before retirement.

You may want to hold more funds as cash and in defensive stocks. Having cash on hand in your retirement or investment accounts can help you benefit from opportunities in the stock markets when the recession takes hold and stock prices plummet.

What Are The Best Inflation Proof Investments?

Investing in an inflationary recession can be hard because you might not have much spare money. However, if you plan to invest in a recession, you will need to make sure your money is going towards a well-managed company.

The company you are investing in should also have low debt, good cash flow, and strong balance sheets. Counter-cyclical stocks do well in recessions and experience price appreciation despite the prevailing economy.

So, in an inflationary environment, how should you prepare your portfolio? Here are some effective asset classes for capital preservation:

  • TIPS

Essentially, the Treasury Department adjusts the value of the principal to reflect the effects of inflation using the Consumer Price Index (CPI). This instrument receives a fixed rate of interest payment based on the adjusted principal twice a year. The final adjustment occurs when the child reaches adulthood.

If the value of the principal has increased due to inflation, the investor will receive the higher, adjusted amount back. However, if inflation has reduced the value of the security, the investor will receive the original face amount of the security.

Let's take a look at how inflation-indexed securities work. Please keep in mind that this simplified example is provided solely for illustration purposes and does not necessarily reflect current market conditions.

  • You put $1,000 into a new 10-year inflation-indexed note at the start of January. The note bears a 3% annualized interest rate and is due semi-annually.
  • The CPI indicates a 2% inflation rate for the first six months of the year in the middle of the year. They will then adjust your principal to $1,020 ($1,000 x 102 percent), and your resulting interest payment will be $15.30 ($1,020 x 3.0 percent x 6/12) for the interest earned during the first six months.
  • They will then adjust your principal to $1,020 ($2,000 x 102 percent), and your resulting interest payment will be $15.30 ($1,020 x 3.0 percent x 6/12) for the interest earned during the first six months.
  • At the end of the year, the index indicates that inflation has risen to 3%. This brings the total value of your principal to $1,030. Your second interest payment would be $30.90 under this scenario ($1,030 x 3.0 percent x 6/12).

Because these instruments already help to cushion the effects of inflation, they offer lower interest rates when compared to other US securities with similar maturities but no inflation protection.

  • Commodities

Given the commodities market's volatility, experts advise investing in commodities through a diversified investment vehicle such as a mutual fund or exchange-traded fund. Prices for raw materials such as oil, metals, and agricultural products typically rise in tandem with inflation, making them a good hedge against it.

However, investors should be aware that commodities can be extremely risky. Commodity prices are heavily influenced by supply and demand, which can be highly volatile. This makes them a risky investment, on top of the fact that investors are using leverage: the possibility of rewards is high, but so is the risk of losses.

Investing in gold is maybe the most popular when it comes to commodities. Gold has a reputation for holding its value when the value of the dollar falls or loses purchasing power. Although gold is praised as an inflation hedge, its performance during inflationary periods is mixed. Gold tends to perform best during periods of extreme inflation, such as when oil prices skyrocketed in the 1970s. It performs worse during periods of lower inflation.

Before investing in commodities, investors should be aware that they are highly volatile, and investors should exercise caution when trading commodities. Because commodities are dependent on demand and supply factors, even minor changes in supply caused by geopolitical tensions or conflicts can have a negative impact on commodity prices.

  • Real Estate

Real estate income is derived from the rental of a property. Real estate performs well in the face of inflation. This is due to the fact that as inflation rises, so do property values and the amount a landlord can charge for rent. As a result, the landlord will earn a higher rental income over time. This aids in keeping up with the rise in inflation. As a result, real estate income is one of the best ways to protect an investment portfolio from inflation.

A report by Gallup shows that a majority of Americans consider real estate as their best long-term investment from a pool of several investment options. Real estate leads the list of preferred long-term investments by 35%, against stocks at 21%, gold at 16%, and Savings accounts at 17%.

Because of the necessity surrounding it, real estate can keep up with inflation. People will always need to live in homes or apartments, so those who invest in this asset class can keep up with inflation. Regardless of the state of the economy or the markets, everyone still uses real estate. And, while returns may decline, overall (real estate) is going to be more stable and a fairly quick recoverer when things start to improve.

However, because real estate is a tangible asset, it is illiquid. You could also consider real estate investment trusts, or REITs, which are more liquid investments that can be bought and sold easily in the market. In many cases, you can buy a group of REITs in the form of a mutual fund or an exchange-traded fund (ETF).
REITs have some disadvantages, such as their sensitivity to demand for other high-yield assets. Treasury securities generally become more appealing as interest rates rise. This can cause funds to flee REITs, lowering their share prices.

REITs must also pay property taxes, which can account for up to 25% of total operating expenses. If state or municipal governments decide to raise property taxes to make up for budget shortfalls, cash flows to shareholders would be significantly reduced.

Should You Buy Shares in a Recession?

Right before a recession, and early on in a recession, stock prices can fall dramatically. This can make it a good time to buy stocks. In some cases, you can even double your investment. Some mutual funds and index funds are more recession-resistant than others though.

Buying high quality stocks with good statistics during a recession is often a good idea, but getting stocks from a new company or a company that doesn’t have much experience might not be the best idea.

Because no one can predict what the stock market will do or how people will react in the short term, it's best to plan your investment strategy when times are good and stick to it even when the market is tanking. 

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The only jobs that are recession proof are those that people will need no matter economic conditions. Medical and health care workers are usually the number one recession proof jobs. Other include IT professionals, utility workers, accountants, credit and debt management counselors, and public safety workers.

Federal government employees and teachers and college professors are also recession proof jobs.

Banks still lend during recessions, but it might be harder to get loans than during normal time periods. Credit requirements will be very strict and banks will be less likely to bend the rules to help people who might have bad credit.

This can make it hard for borrowers who don’t have excellent credit scores. Banks might also be more strict checking income and debt rations.

Generally, new car prices do fall a little during a recession. As time passes though, the new car prices might even end up being higher than they were before the recession. In some cases, car prices will not rise or fall though. As much as the government tries to offer incentives during this time, sometimes car prices can’t drop. However, in case of inflationary recession it’s very hard to predict whether it will be the case this time. Since commodities and asset process expect to increase, we can see an increase of car prices as well.

Gas prices might also climb, so if you get a gas-guzzling car at a cheap price, you might still have to pay more for gas than you normally would.

Companies that do well during a recession are ones that are necessary no matter how much the economy is falling. People will always have certain needs that need to be fulfilled and these businesses will still thrive during a recession.

They include health care providers, financial advisors and economists, auto repair and maintenance, home maintenance stores, rental agents and property management companies, and grocery stores.

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Picture of Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
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