5 Ways to Beat Inflation and Prepare for a Possible Recession in 2024

In October 2021, US inflation hit 6.2% – the highest rate since 2008. In January 2022, it rose to 7.5% – the highest rate in 40 years.

In June 2022, it set a new high of 9.1% before falling to 8.5% in July. At the moment, it stands at 7.7%, which is still relatively high.

To curb inflation, the Fed has raised interest rates six times this year. But as the chart above shows, inflation is still pretty high.

Why is Skyrocketing Inflation Such a Problem?

Rising inflation means a steady rise in the general price level. If prices continue to rise, employees will start demanding higher wages to keep up with the increasing cost of goods.

Higher wages will push up the cost for businesses which could translate to higher prices for goods.

This can lead to an upward spiral of wages and prices which can weaken the purchasing power of money and deal adverse effects to an economy.

To combat inflation, the Fed has been raising interest rates. When interest rates rise, businesses find it more expensive to borrow and invest which translates to less economic activity.

Less economic activity means fewer jobs are created. A fall in economic activity can also lead to a slash in wages. Fewer jobs and less wages mean less money for households which translates to less spending.

How Inflation Affects You

High inflation is always associated with a serious problem: a decline in the purchasing power of money. Rising inflation means you need more and more money to buy the same quantity of goods.

To fight this problem, the government employs fiscal or monetary policy. An example of using fiscal policy to fight inflation is raising taxes to disincentivize spending. An example of using monetary policy to fight inflation is raising interest rates to increase the cost of borrowing money.

Since raising taxes can make a government unpopular, raising interest rates has been the most favorable option for fighting inflation. This is evident in the fact that the Fed has raised interest rates six times this year.

While increasing interest rates alleviates the problem of inflation over time, it raises the cost of borrowing money for businesses.

But it’s not just businesses that find it expensive to borrow money. High interest rates also raise the cost of borrowing money even for individuals. For example, high interest rates mean that mortgages will be more expensive.

While the Fed is trying hard to combat inflation, it will take time to get back to pre-pandemic levels. This article is a guide to help you scale through the times.

5 Ways to Beat Inflation and Brace Up For a Possible Recession in 2023

Here are five ways to beat inflation and prepare for a possible recession:

• Diversify your investment
• Cut Down Expenses
• Use Debt Responsibly
• Stock Up on Food and other necessities
• Have an Emergency Fund

1. Diversify your investment

Investing is the best hedge against inflation. When you invest, you put your money to work by purchasing an asset that generates cash flow and/or goes up in value. When it comes to investments, there’s a wide range to choose from each with varying risk-to-reward ratios. 

As a rule of thumb, the higher the risk associated with an investment, the higher the potential reward. The reverse is also the case, the lower the risk associated with an investment, the lower the potential reward. 

Since risk is closely tied to reward in the world of investments, it’s important to take your risk appetite into consideration when deciding what to invest in. 

Another key consideration when it comes to investing is time. Some investments are best suited for the short term, while others only yield good returns over the long run. 

Here are three inflation-proof  investments to consider: 

Real Estate

Real estate is a good option if you are looking to invest for the long term. Not only do you benefit from cash flow in the form of rent and additional payments such as pet policies, but you also benefit from capital gains when the value of the property goes up. 

Bonds

Bonds have become attractive since the Fed started raising interest rates to curb inflation. As the Fed ratchets up interest rates to drive down inflation, the yield on bonds will rise.

Gold

Gold is one of the best inflation hedges. As inflation soars and fiat money loses value, gold a.k.a real money gains value. Gold prices also seem to soar in times of uncertainty.

Historically, the more uncertain people get about the future, the more they seek mediums that provide some degree of certainty. It’s human nature. We can’t deal with uncertainty for an extended period of time.

In uncertain times like this, commit some of your investment funds to gold. As fiat money loses value, gold will continue to rise in price. The relationship between fiat money and gold has always been inversely proportional.

2. Cut Down On Expenses

Keep track of spending

Keeping track of your spending is a good way to prioritize your expenses: you can see where your money is going and whether needs are being prioritized over wants or vice versa.

Every penny saved is a penny earned especially during inflation – that money will be more useful elsewhere.

To make it easier to track your spending, prioritize your expenses in a budget that helps you focus on your needs.

Keeping track of your spending will also help you keep on top of your payments so that you don’t have to pay extra charges and fees.

Buy the common items

“Live below your means” is banal yet effective advice to manage your personal finances, especially in a time of skyrocketing prices. Inflation dictates that you spend way below your means so that you have enough left over to save. 

Use a fuel-efficient car

Gas prices have grown exponentially since 2020, and although prices have receded, they are still higher than pre-pandemic levels.

If your car is not fuel efficient, consider using public transport or walking if your destination is within walking distance.

3. Use Debt Responsibly

Inflation is a good time to exercise some self-control. Use your credit cards wisely and if possible, shop only with cash so you can keep track of what you are buying.

Don’t take a loan if it’s not urgent. Rising interest rates mean borrowing money will be more expensive. Don’t buy something you don’t really need.

4. Stock Up on Food

Buy the things you need and enjoy in bulk when the prices are favorable. If you find a place with great prices for something you need, stock up immediately.

5. Have an Emergency Fund

An emergency fund is a safety net to fall back on in tough times. Make sure your emergency fund has enough to cover living expenses for up to three months without any income coming in. inflation does not stop emergencies from happening.

To Sum It Up

While a moderate level of inflation is necessary for economic growth, skyrocketing inflation has the opposite effect.

In the long run, it leads to an upward spiral of wages and prices and erodes the purchasing power of money.

To curb inflation, the Fed has been raising interest rates to disincentivize spending and drive prices down.

While this has had some effect on the inflation rate, it will take time to get back to pre-pandemic levels.

In the meantime, you will have to hedge against inflation and brace up for a possible recession as economic activity recedes due to rising interest rates.

The best way to hedge against inflation and brace up for a possible recession is to diversify your investment portfolio.