When investors discuss the ups and downs of the economy, two forces dominate the conversation: inflation and recession. Understanding these opposing forces is key to learning how they affect different asset classes – from stocks and bonds to commodities and currencies. 

Each asset class plays a distinct role in the economy, so their performance shifts differently during periods of inflation and recession. These differences often correspond with shifts observed in broader market behavior.  

During inflation, markets often reflect increased caution as participants reassess pricing and value. In contrast, recessions typically bring lower confidence and falling asset prices, prompting investors to prioritise capital protection and seek stability over growth. 

Key Points 

• Inflation and recession affect equities, bonds, commodities, and currencies in different ways, shifting investor focus between growth, income, and capital preservation. 

• During inflation, real returns are squeezed, pushing investors towards assets that can better keep pace with rising prices, such as certain equity sectors, commodities, and inflation-linked bonds. 

• In recessions, falling growth and rising risk aversion usually benefit safe-haven assets like government bonds, gold, and defensive currencies, while cyclical sectors and riskier debt often come under pressure. 

Understanding the Link Between Inflation, Recession, and Asset Performance 

Markets move based on supply and demand, which is in turn influenced by expectations. Both inflation and recession influence monetary policy, investor confidence, and the perceived value of different assets. 

When inflation rises, central banks typically raise interest rates to cool demand. This makes borrowing costlier, often slowing investment and consumer spending. During these periods, investors tend to focus on assets that can preserve value or keep pace with rising prices. Some examples include defensive stocks, bonds, real estate, and safe-haven assets such as gold.  

During recessions, policymakers tend to cut interest rates and expand fiscal spending to stimulate economic growth. This causes borrowing to become less expensive, but bond yields also come down at the same time – this combination sometimes coincide with increased interest in certain risk assets, although market behaviour varies widely.  

Yet, because negative sentiment is prevalent during recession, investors are driven to seek capital preservation. To do so, market sentiment often becomes more risk-averse, and attention may shift toward assets historically associated with income or stability, depending on conditions. 

The key takeaway here is that investor sentiment and risk appetite changes as the economy cycles through inflation and recession, impacting different asset classes in various ways as the cycle progresses.  

Related Reads: Higher for Longer What the Fed’s Cautious Stance Means for Markets in 2025 and Beyond 

Equities (Stocks) 

Stocks represent ownership in companies and are often seen as a barometer of economic health. Their prices reflect expectations about corporate earnings, consumer spending, and future growth prospects.  

Due to their popularity, equities sit at the centre of most investment portfolios. This means that changes in inflation and recession can have an outsized impact on market sentiment. Inflation affects company costs, pricing power, and valuations, while recessions reshape demand, profitability, and investor appetite for risk.  

Understanding how these forces interact is key to interpreting how the stock market behaves across different stages of the economic cycle. 

Equities During Inflationary Periods 

The impact of inflation on stocks can vary according to how serious it is. Moderate inflation often supports earnings growth, as prices and revenue rise. This is because during moderate inflation, prices remain generally acceptable to consumers, supporting sales and revenue growth.  

However, when inflation becomes too high, prices increase too much for consumers, who respond by reducing consumption, putting pressure on revenue. At the same time, corporates face various cost increases – wages, materials, financing, and etc. All these result in lower profit margins and poorer earnings reports, which prompt investors to sell their stocks, causing a drop in stock valuations.  

But as explained in this section’s opening, not all equities see reduced demand during high inflation. Historically, certain sectors hold up better than others. 

Sectors that hold up well during high inflation  

Energy and commodities: Rising prices in oil, gas, and raw materials often boost revenues for companies in these sectors, making them standout performers during inflationary periods. As these services are essential to everyday life, producers can pass price increases directly to consumers without losing demand.  

Energy firms have historically posted stronger earnings during periods of rising fuel prices. These sectors have historically shown periods of stronger performance during certain past inflationary phases, although outcomes vary depending on broader market conditions. 

Consumer staples: Demand for essentials like food, beverages, and toiletries remains steady even when living costs rise, providing support for this category of stocks. These companies often have strong brand loyalty and pricing power, allowing them to pass cost increases onto consumers more easily.  

As a result, their earnings tend to be more resilient during inflationary periods, offering investors a degree of stability when market volatility increases. 

Financials: Banks and other financial institutions can benefit from higher interest rates, as rising rates are reflected in new loans and variable-rate products. This typically boosts revenue by widening the net interest margin – the difference between what banks earn on loans and pay on deposits.  

However, the benefit is conditional on credit quality: if inflation persists too long and economic growth weakens, loan defaults can climb and offset these gains. Well-capitalised banks with diverse lending portfolios tend to manage this balance best during inflationary cycles. 

Sectors that falter during high inflation 

Meanwhile, sectors that rely heavily on discretionary spending or cheap credit (such as technology or luxury goods) tend to underperform when inflation surges.  

Tech or growth stocks: Tech stocks, growth stocks or stocks that rely on cheap credit to continue growing face downward pressure because borrowing becomes more expensive, forcing companies to pay higher interest, which can impact profitability and company outlook.  

Discretionary spending: As for stocks that depend on discretionary spending (think coffee chains, restaurants, high-end consumer items), high inflation causes consumers to spend more on essentials, leaving less money for dining out, luxury goods or other non-essential spending. This causes falling revenue and poorer outlook, leading to declines in stock prices. 

Equities during recessions 

Recessions are characterised by slowing economic activity, weaker demand, and falling confidence. As consumers cut back on spending and businesses reduce investment, corporate earnings shrink. This drop in profitability often leads to lower stock valuations, as investors anticipate tougher conditions ahead. Market sentiment becomes cautious, trading volumes decline, and investors start to prioritise capital preservation over growth. 

However, not all sectors suffer equally. Just as some stocks hold up better during inflation, certain parts of the market show greater resilience when economic growth stalls. 

Related Reads: What Assets Can You Trade During a Recession? 

Sectors that hold up well during recessions 

Defensive sectors: Industries such as healthcare, utilities, and consumer staples are often more stable during recessions because they provide goods and services people continue to need regardless of economic conditions.  

Utility companies supply electricity, water, and gas – essential services with consistent demand – while healthcare firms benefit from ongoing medical needs and pharmaceutical consumption. Consumer staples companies, meanwhile, maintain steady revenue from everyday necessities like food and cleaning products. These characteristics have historically been associated with relatively more stable outcomes in some past downturns, although market conditions can differ significantly. 

Telecommunications: Another area that tends to hold up well is telecommunications. People continue to rely on internet and mobile services even during economic downturns, keeping revenue streams relatively stable. Many telecom firms generate stable cash flows and may pay dividends, which has historically attracted attention during some periods of economic uncertainty. 

Sectors that struggle during recessions 

Cyclical sectors: Industries that depend on consumer confidence and discretionary spending (manufacturing, travel, and retail, for example) are typically hit hardest during a recession. As households tighten budgets, big-ticket purchases like cars, furniture, and holidays are postponed. This leads to reduced sales and weaker earnings, prompting investors to avoid these stocks until clear signs of recovery appear. 

Financials and real estate: Although banks can sometimes benefit from lower interest rates, recessions often bring rising loan defaults and tighter credit conditions. Borrowers may struggle to repay loans, increasing banks’ risk exposure and reducing profitability. Real estate companies can also feel the impact, as demand for new housing or commercial space falls and property values soften. 

Technology and growth stocks: Tech and growth-oriented companies frequently experience sharper downturns because their valuations are based on future earnings potential. When uncertainty rises and interest rates fall to near zero, investors still tend to rotate away from riskier, high-growth names into more stable or dividend-paying stocks. This shift has historically coincided with notable declines in share prices for these sectors during prolonged recessions. 

Bonds (Fixed Income) 

Bonds represent loans made by investors to governments or corporations in exchange for regular interest payments and the return of principal at maturity. They’re widely used for income generation and portfolio stability. Because bond prices move inversely to interest rates, their performance is closely tied to monetary policy and inflation trends. 

Inflation and recession affect bonds in opposing ways. Rising inflation tends to erode the value of fixed payments, while recessions – usually accompanied by falling interest rates – can push bond prices higher. Understanding these dynamics helps readers interpret how markets may behave across different conditions. 

Bonds during inflationary periods 

When inflation rises, the purchasing power of future interest payments declines. Investors demand higher yields to compensate for this loss, which pushes existing bond prices down. Central banks often respond by raising interest rates to contain inflation, further reducing the value of previously issued bonds with lower coupons. 

However, not all bonds are affected equally. The degree of inflation and the issuer’s credit quality play major roles in performance. 

Types of bonds that struggle during high inflation 

Fixed-rate government and corporate bonds: Traditional fixed-rate bonds are among the most vulnerable during inflationary periods. As prices rise, the real (inflation-adjusted) return from their fixed payments diminishes. This can lead to capital losses for investors holding long-duration bonds, as markets demand higher yields to offset the inflation risk. 

Long-term bonds: Bonds with longer maturities tend to fall more sharply in value when inflation expectations rise. Their longer payment schedules make them more sensitive to changing interest rates, as the fixed income they provide becomes less attractive relative to newer, higher-yielding issues. 

Bonds that hold up better during high inflation 

Inflation-linked bonds: Instruments such as US Treasury Inflation-Protected Securities (TIPS) or UK index-linked gilts adjust both their principal and interest payments in line with inflation. This feature helps preserve real returns, making them a popular hedge against rising prices. 

Short-term bonds: Shorter-dated bonds are less sensitive to interest rate changes and inflation expectations. Because they mature sooner, investors can reinvest proceeds at higher rates relatively quickly. This flexibility can make them less sensitive to sustained inflation. 

Bonds during recessions 

Recessions usually lead to lower growth and reduced inflationary pressure. Central banks respond by cutting interest rates to stimulate the economy. As rates fall, existing bonds with higher coupons become more attractive, pushing their prices higher. 

Bonds that perform well during recessions 

Government bonds: Sovereign bonds, particularly those from stable economies such as US Treasuries or UK gilts, are often viewed as safe havens. Investors flock to them for security and capital preservation, driving yields down and prices up. These assets have historically attracted interest during certain downturns due to their perceived stability. 

High-quality corporate bonds: Well-rated companies with strong balance sheets continue to service their debt through recessions. Their bonds typically maintain value and can provide a steady source of income, offering a middle ground between safety and yield. 

Bonds that underperform during recessions 

High-yield or “junk” bonds: These are issued by companies with weaker credit ratings. In exchange for taking on greater risk high-yield bonds typically offer higher coupon rates to compensate for higher credit risk. However, during recessions, default risk rises as earnings fall and refinancing becomes harder. As a result, their prices often decline sharply, reflecting investor caution. 

Emerging market debt: Bonds issued by developing economies can also suffer when global growth slows, as capital tends to flow back to safer developed markets. Currency depreciation in these regions can further erode returns for foreign investors. 

Commodities 

Commodities are physical goods such as oil, gold, metals, and agricultural products. They are often seen as a barometer of global economic health because their prices respond directly to supply, demand, and inflation trends. Unlike financial assets, commodities are tangible, and their value typically rises with production costs and inflation. 

Because of this link, commodities tend to perform differently across economic cycles, rallying during inflationary booms and weakening when recessions dampen demand. 

Commodities during inflationary periods 

Inflation and commodities often move in tandem. As the cost of raw materials and energy rises, it feeds directly into consumer prices, reinforcing inflationary pressures. For investors, this makes commodities an asset class that has historically shown strength in some inflationary environments. 

Commodities that perform well during high inflation 

Energy: Oil and natural gas prices often surge during inflationary periods, particularly when supply constraints coincide with strong demand. Energy companies may experience revenue increases when prices rise, boosting their profits and, by extension, their stock valuations.  

Gold: Gold is often viewed as a traditional asset that has retained value during certain inflationary or uncertain periods. It retains intrinsic value and is not tied to any currency, which makes it attractive when paper money loses purchasing power. Gold is often viewed as a potential store-of-value during certain periods of uncertainty, but its performance can vary across market cycles. 

Industrial metals: Metals like copper, aluminium, and nickel tend to rise when inflation is driven by strong manufacturing demand. They’re essential for construction, infrastructure, and technology production, which ties their prices closely to global growth expectations. 

Agricultural goods: Another essential commodity, agricultural goods tend to hold steady during high inflation, as consumers need to continue buying such goods, even if prices increase.  

Commodities that struggle during high inflation 

While there are classes of commodities that can do well during inflation, it’s important to understand that commodities on the whole are swayed by supply and demand.  

If inflation becomes extreme, which introduces a high degree of uncertainty, demand for commodities can slow down as companies and consumers cut back.  

Commodities during recessions 

During recessions, economic activity slows, reducing demand for raw materials and energy. Manufacturing, construction, and trade all contract, pushing commodity prices lower. However, not all commodities decline equally – some retain value as investors seek safety. 

Commodities that hold up well during recessions 

Gold: Once again, gold is commonly viewed as a potential safe-haven asset, though its performance can differ depending on market conditions. During recessions or financial stress, investors often shift funds from riskier assets like equities into gold, driving its price higher even as other commodities fall. 

Defensive agricultural goods: Basic food staples, such as wheat and rice, can hold their value better during recessions, as demand for essential goods remains relatively stable. 

Commodities that struggle during recessions 

Energy and industrial metals: Oil, gas, and base metals are typically among the hardest hit. As manufacturing output and transport demand drop, inventories rise and prices fall. For example, during the 2020 pandemic recession, global oil prices temporarily collapsed due to a sharp reduction in travel and industrial activity. 

Forex (Foreign Exchange) 

The foreign exchange market (forex) reflects how currencies trade relative to one another, influenced by monetary policy, trade balances, and investor sentiment. Exchange rates act as a global mirror of economic confidence, reacting quickly to inflation and recession dynamics. 

Forex during inflationary periods 

When inflation rises sharply, a country’s currency often weakens as its purchasing power declines. Investors become wary of holding assets denominated in that currency, especially if they expect further erosion in value. 

Currencies that perform well during inflation 

Currencies of countries tightening policy: When central banks respond to inflation by raising interest rates, their currencies may show periods of strength, although this depends on wider market factors. Higher yields attract foreign investors seeking better returns. For instance, during US rate-hiking cycles, the US dollar often appreciates as global capital flows into dollar-denominated assets. 

Commodity-linked currencies: Nations that export commodities, such as Australia (AUD) and Canada (CAD), can see their currencies rise when global commodity prices surge. Higher export revenues improve trade balances and attract investment inflows. 

Currencies that struggle during inflation 

High-inflation economies: Currencies of countries experiencing persistently high inflation (such as Turkey or Argentina in recent years) often depreciate rapidly. Investors lose confidence, leading to capital outflows and further downward pressure on exchange rates. 

Forex during recessions 

During recessions, investor priorities shift from chasing yield to protecting capital. Exchange rates adjust to reflect risk aversion, trade slowdowns, and shifting expectations about monetary policy. 

Currencies that perform well during recessions 

Safe-haven currencies: The US dollar, Japanese yen, and Swiss franc are typically seen as safe havens during global downturns. These currencies often see increased demand during periods of risk aversion. Their stability and liquidity make them attractive when other assets become volatile. 

Reserve currencies: Major global currencies supported by large, stable economies such as the euro and pound sterling can also attract inflows during mild recessions, particularly when investors diversify away from emerging market risk. 

Currencies that struggle during recessions 

Export-dependent currencies: Economies reliant on manufacturing and commodity exports, like South Korea or Brazil, often see their currencies weaken as global demand slows. Lower trade volumes reduce foreign currency inflows, putting pressure on exchange rates. 

Emerging market currencies: Recessions usually drive investors toward safety, leading to capital outflows from emerging markets. This weakens their currencies and raises borrowing costs, compounding economic difficulties. 

Asset Class Performance in Inflation vs Recession 

Asset Class	Inflation	Recession
Equities	Performance can vary — historically, some sectors (e.g., energy, consumer staples) have shown relative resilience, while others (such as technology or discretionary sectors) may face pressure.	Broader equity markets often experience slower performance, while defensive sectors have historically shown relative stability.
Bonds	Bond prices may come under pressure when yields rise. Inflation-linked bonds are designed to help preserve real value	Bond prices may stabilise or improve when interest rates fall, and high-quality bonds may exhibit safe-haven characteristics.
Commodities	Certain commodities, including gold and energy, have historically shown strength in certain conditions during inflationary periods.	Performance can vary — industrial commodities have often softened during some slowdowns, while gold may see increased demand.
Currencies	Currencies of economies with high inflation may weaken; interest rate hikes can provide temporary support.	Safe-haven currencies may strengthen, while currencies linked to exports or global demand may face downward pressure.

Key takeaways 

Inflation and recession influence markets in opposite ways. Inflation brings rising prices and tighter policy, while recessions are marked by slower growth, softer demand, and lower interest rates. 

Equities react differently across cycles. Energy, staples, and financials often hold up during inflation, while growth and discretionary stocks weaken. In recessions, defensive sectors such as healthcare, utilities, and staples tend to show more stability. 

Bonds weaken during inflation as yields rise, but they typically strengthen in recessions when central banks cut rates. Inflation-linked and short-term bonds offer protection during high inflation, while government and high-grade corporate bonds lead during downturns. 

Commodities often gain when inflation accelerates, especially energy, metals, and gold. In recessions, demand for industrial commodities falls, but gold frequently rises as a safe-haven asset. 

Currencies shift with interest rates and risk appetite. Inflation can support currencies tied to rate hikes or commodity exports, while high-inflation economies often see depreciation. In recessions, safe-haven currencies such as the US dollar, yen, and Swiss franc typically strengthen. 

Overall, investor priorities change with the cycle—preserving purchasing power during inflation and protecting capital during recessions. Understanding these dynamics helps investors interpret market behaviour more clearly and navigate each stage of the economic cycle with greater confidence. 

Frequently Asked Questions 

1. Which asset class performs best during inflation? 

Commodities, especially gold and energy, have historically tended to perform well during inflationary periods. Their prices usually rise alongside the cost of goods and raw materials, helping investors preserve real purchasing power. Gold is particularly valued for its role as a store of wealth when paper currencies weaken, while energy prices often climb as production and transport costs increase.  

Inflation-linked bonds, such as TIPS or index-linked gilts, have historically adjusted payouts with inflation, which can help preserve real value. 

2. What happens to bonds when inflation rises? 

Rising inflation reduces the real value of a bond’s fixed payments, leading investors to demand higher yields to compensate for lost purchasing power. This can push existing bond prices down, especially for long-term government or corporate bonds. Central banks often raise interest rates to combat inflation, reinforcing this effect.  

Inflation-linked bonds are less affected because their principal and interest payments move in step with the inflation rate. Watching the yield curve can also offer historical insights – when short-term yields rise faster than long-term ones, a yield curve inversion has sometimes signalled expectations of slower growth or a future recession. 

3. Do stock markets fall before or after a recession starts? 

Stock markets have historically tended to fall before a recession begins, as investors anticipate weaker earnings, slowing GDP growth, and softer consumer spending. Equity prices act as a leading indicator of a recession, reflecting investor sentiment and future expectations rather than current conditions.  

Other economic warning signs – such as a flattening or inverted yield curve, declining manufacturing output, and rising unemployment – have often accompanied this shift in sentiment. Historically, markets have sometimes bottomed out before GDP data confirms the downturn, beginning to recover once investors anticipate a potential rebound. 

4. Why is gold seen as a hedge against inflation? 

Gold maintains intrinsic value that isn’t tied to any single currency or central bank policy, which makes it attractive when inflation erodes the purchasing power of money.  

During high inflation or economic uncertainty, investors have historically bought gold to protect their wealth and diversify portfolios. Its price has tended to rise when real interest rates are low or negative – a common feature of inflationary environments.  

Gold has also historically sometimes performed well during recessions or periods marked by economic warning signs, as investors have sought safe, tangible assets that can retain value even when GDP growth slows or financial markets become volatile. 

5. How do currencies react during a global recession? 

During a global recession, investors have historically moved capital into safe-haven currencies such as the US dollar, Japanese yen, or Swiss franc. These currencies strengthen because they are backed by stable economies and deep financial markets.  

Meanwhile, currencies from export-heavy or emerging economies often weaken as global trade and demand decline. Factors like falling GDP, rising unemployment rates, and a flight to liquidity have historically driven this behaviour.  

When traders observe classic signs of a recession, such as a yield curve inversion, shrinking industrial output, or weakening consumer confidence, they may historically have adjusted forex positions in favour of stability over yield, which can reinforce demand for defensive currencies.