Why the UK might be headed toward “stagflation”, and what it means for your wealth

In February, the Bank of England (BoE) halved its forecast of economic growth for 2025, at the same time warning that families could face further price rises. This has led to some predictions that the UK economy is headed towards a period of “stagflation” – where the economy is no longer growing but prices continue to increase.

Over the following months, global market turmoil hit the headlines as tariffs introduced by the Trump administration caused widespread consternation.

You may have read our previous article explaining why the market volatility from the Trump tariffs is a reminder of the importance of staying invested, and how your financial plan is built to withstand market movements like this.

This time, you can find out what stagflation means, how it could affect your wealth, and again, why it’s crucial to keep calm.

Stagflation is a time of high inflation and poor economic growth

Stagflation essentially means a period in which the economy is slowing, stagnating, or declining, coupled with high inflation and rapidly rising prices. So, it could mean your money has less spending power at a time of job insecurity and business performance instability.

Inflation has been a headache for the government since the Covid-19 pandemic, which saw a slowing of exports and imports, along with quantitative easing – a BoE policy of essentially injecting money into the economy to drive growth – adding to inflation issues. The war in Ukraine also inflamed the inflation problem, with supply chain disruptions on food and fuel causing big price hikes.

The BoE aims to keep inflation at 2% each year, and the most recent figures from the Office for National Statistics show that it stood at slightly above this target, coming in at 3.5% in the 12 months to April 2025. However, poor levels of economic growth have led to analysts warning that stagflation could be imminent.

In theory, stagflation is a paradox; inflation and economic growth should move together, with growth leading to rising prices, driving inflation and so on. So, when they move to have an inverse relationship in stagflationary conditions, it can be difficult to work out what can be done to prevent it.

Although the reasons for stagflation are not fully understood, there are three commonly cited causes:

1. Supply chain issues

Falls in the availability of vital goods, such as food or fuel, can lead to stagflation. For example, if oil becomes scarce and fuel prices increase, goods could become more expensive to transport, leading to a knock-on effect of higher prices for food and other commodities.

2. Too much money in the economy

Although this may sound like a good thing, the government injecting money into the economy through quantitative easing means there can be more money than goods. As a result, this increases demand and sees prices rise, pushing up the cost of living while dampening economic performance.

3. Government policy

2020 is a recent example of how policy can create the conditions for stagflation. In that unique year, the UK government faced unpredictable challenges, such as the pandemic and Russia’s invasion of Ukraine, which forced economic policy to capitulate to these events.

But any restrictive policies or those that put additional pressure on businesses, investors, and taxpayers can all contribute to a state of stagflation.

3 areas of your wealth that could be affected by stagflation

Savings

It can be harder to save during stagflation as you’ll need to spend more of your income purely to cover your usual costs, leaving less left over for your savings pot.

Plus, high inflation will mean your savings don’t have the same purchasing power, especially if inflation levels are higher than the interest rate you receive.

In ordinary circumstances, the BoE might increase interest rates to combat rising inflation, making borrowing more expensive and encouraging saving over spending. In turn, this reduces inflation.

However, when facing stagflation, this is not so much of an option, as the BoE will usually cut interest rates to drive economic growth.

In its most recent review on 8 May, the BoE did in fact cut interest rates, bringing its base rate down from 4.5% to 4.25%.

As a result, you may see the rates on your savings accounts fall. The upside to this is that the interest rate charged on debt may fall, as might your mortgage payments (if you are on a variable- or tracker-rate mortgage).

Investments

Income depletion also means you’re less likely to have money to spare for other investments outside your pension.

Stagflation can render stocks and bonds vulnerable, as reduced profits can impact stock prices. Meanwhile, bond values can go down because, as inflation rises, the income they pay loses value in real terms, just like cash.

It could be a good idea to evaluate your investment portfolio, ensuring it’s as diverse as possible to withstand economic shocks. You could also look at reducing risk across your portfolio.

Pensions

It can be harder to keep up with your regular pension contributions in a period of stagflation, especially if your income is needed for more everyday purchases.

However, if you are able to maintain your contributions, it can be sensible to do so. Even a brief pause in what you pay in could significantly affect the size of your overall pot in later life.

Meanwhile, if you’re already retired, your pension’s investment returns may be lower, leaving you with a smaller-than-expected retirement income. That’s because you’ll need to sell more units in your pension to provide the same level of income.

This is why it can be sensible to keep an emergency fund of cash that will last for between one and two years’ worth of income in retirement. That way, you can maintain your lifestyle, while leaving your pension investments to potentially recover as the economy comes out of this period of stagflation.

Your financial plan is built to withstand uncertainty, including from stagflation

Any form of economic volatility can be unnerving, and stagflation is no exception.

But, just as when markets are volatile, it’s important to keep calm and continue to look to the long term. Try to resist the temptation to make impulse decisions, as your financial plan is built to withstand short-term fluctuations like this.

For example, by working with us at Caliber Financial Management, we might have recommended steps such as:

• Holding an emergency fund of cash so you don’t have to sell assets at lower prices
• Reviewing your budget and seeing whether there are areas where you can cut back and make savings
• Diversifying your portfolio and pension into a range of assets that can provide the returns you need over time, and ensuring your investments are aligned with your goals for the future.

During periods like this, it can be a good idea to speak with your financial planner. We can review your plan with you and help you steer a steady course through uncertain times.

Get in touch

Concerned about the prospect of stagflation? Talk to us about how to navigate periods of economic uncertainty.

Email contact@caliberfm.co.uk or call 01525 375286 to speak to one of our team today.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.