Many businesses have experienced a challenging past 12 months. The pandemic and resulting quarantine measures may be starting to ease, but companies still need to face the prospect of high inflation on the horizon. While inflation was on a downward trend previously, the Federal Reserve just raised its estimate of average inflation this year from 3.4% to 4.2%.

An increase in inflation has a number of effects on the economy. First and foremost, it erodes purchasing power as the cost of retail goods and services increases. It can also raise the cost of borrowing as interest rates increase due to increased risk.

Inflation increases can also fuel further inflation, creating a feedback loop. As people spend more quickly to reduce the time holding depreciating currency, the supply of money is greater than the demand — so the purchasing power of the currency falls at an even faster rate.

Invest in Stocks

Despite the lack of confidence, most people express about stocks, owning some equities can be a very good way to combat inflation. Think of your household as a business. If a company cannot properly invest its money in projects that will deliver a return above its costs, then it, too, will fall victim to inflation. The basic premise of business success is that corporations will sell their goods at increasing prices, which will lead to elevated revenues, earnings, and inevitably, stock prices.

Invest in a Home

When done for the right reasons, like buying a home to live in, real estate is always a good investment. Problems occur when a buyer’s goal is to flip the property they just bought at a profit. Although experienced real estate investors are able to find hidden values in properties, the average person should focus on purchasing a home with the intent of holding it, even if only for a few years. Real estate investments do not typically generate a return within several months or weeks; they require an extensive waiting period in order for values to increase.

Invest in Yourself

By far the best investment you can make to be prepared for an uncertain financial future is an investment in yourself. One that will increase your future earning power.

This investment begins with quality education and continues with keeping skills up-to-date and learning new skills that will match those most needed in the not-too-distant future. Being able to stay on top of a business’s changing needs may not only help to inflation-proof your salary but also recession-proof your career.

Renegotiate contracts and terms with suppliers.

Advises Dennis Ceru, an entrepreneurship professor at Babson College. They may be willing to give you discounts for preordering, paying early, or buying bulk, he says. And in the case of cellphone or internet providers, you may have some leverage given the competition they face.

Evaluate your labor market vulnerability.

The impact of inflation on labor markets is a bit unpredictable. While we cannot foresee the exact professions and skillsets that will be impacted, we can reasonably expect the following labor markets to feel some effect of inflation:

High-demand professions like software engineering

Low-wage and minimum wage jobs

1099 contract laborers, who typically can reprice their wages faster than W2 workers 

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