Metis AM
Inflation has barely left the news in the last five years, as the UK’s rate has fluctuated massively since the Covid-19 pandemic began.
After a period of on-target inflation at the end of 2024, in February 2025, the Bank of England (BoE) stated that it expects inflation to rise temporarily this year, reaching 3.7%. It notes that this will likely be because of higher energy prices, but that it should fall to 2% (the BoE’s target rate) again.
However, with this announcement comes concerns that the UK may be facing a period of stagflation. As the name suggests, this is a combination of stagnation and inflation – a period when the economy is not growing but prices are.
This can have a variety of effects on both consumers and businesses. However, to understand the impact stagflation could have on you, it’s important to know what it means and why it happens.
Here’s what you need to know about stagflation and its potential effects on your money.
Stagflation has been called a “perfect storm” of economic challenges
Stagflation is a particularly challenging economic condition, typically characterised by three things happening simultaneously. These are:
- Slow economic growth
- High levels of unemployment
- High prices as a result of inflation.
Essentially, stagflation is when the economy stagnates, but the cost of living continues to rise.
There are several factors that can contribute to stagflation, including:
- Sudden increases in energy prices, often as a result of reduced fuel supplies.
- Disruptions to global supply chains, occurring because of natural disasters, accidents, or a break in manufacturing.
- Increased business costs due to increased raw material price increases, labour costs, and new regulations. These can lead to higher prices for consumers (in other words, a rise in inflation).
Many of the abovementioned factors have kept inflation high in the UK. Although inflation has come down significantly since the ONS revealed a high of 11.1% in October 2022, the latest 3% headline figure is still higher than the BoE’s 2% target.
The UK’s economic growth is also slowing, with almost no growth at all in the three months to December. According to the ONS, real GDP is estimated to have grown by just 0.2% in the three months to January 2025.
Historically, stagflation has been relatively rare, and that’s because economic growth and inflation tend to move in tandem – although in 2023, the UK did experience a brief period of stagflation due to the pandemic.
Overall, though, when the economy is booming, prices tend to rise. When it slows down, inflation usually cools. Stagflation doesn’t follow this pattern, making it a challenging environment for policymakers. Unfortunately, stagflation isn’t just an abstract economic concept, and it can have tangible effects on your personal finances.
Stagflation could affect stocks, bonds, cash savings, and even the property market
When the economy stagnates but prices continue to rise, it can affect everything from your investment portfolio to your long-term retirement plans.
Here’s what you need to know about the different areas of wealth that stagflation could affect.
1. Stocks and bonds
In a stagnant economic environment, both stocks and bonds can become more vulnerable. This is because slower economic growth can lead to reduced company profits, which in turn can negatively affect stock prices.
Bonds, particularly those with fixed interest rates, are susceptible to inflation. As inflation increases, the real-terms value of future bond payments decreases. This could make them less attractive as an investment, which may cause their prices to decline.
2. Cash savings
Inflation can significantly reduce the purchasing power of your cash savings, particularly if inflation exceeds the interest rate you’re earning on your money.
For example, if inflation rises to 3.7% as the BoE predicts, then the average cost of goods and services will likely rise by 3.7%, too. If your savings aren’t earning at least that much in interest, your money won’t be worth as much in the future.
That said, in response to rising inflation, the BoE usually boosts its base rate of interest, making borrowing more expensive and slowing down consumer spending. This normally means that interest rates on savings increase along with it.
So, although it’s important to protect your savings from being eroded by inflation, make sure to keep an eye out for competitive interest rates in 2025.
3. Pensions and long-term assets
Much like cash savings, stagflation can affect the long-term spending power of your pensions and retirement savings.
If your pension’s investment returns are low because of economic stagnation, and inflation erodes the value of your pot once you begin to spend it, your retirement income may not stretch as far as you expected it to.
4. Property
The effects of stagflation on property can vary. Property values tend to rise alongside inflation, so properties can sometimes act as a shield against inflation. In other words, if you were to sell in 20 years, the money you’d receive from the sale would hold up against any future cost of living expectations.
However, because interest rates can rise as a result of high levels of inflation, mortgages might get more expensive. This could slow the housing market down and reduce demand.
When demand drops, so too can prices, potentially affecting the future value of your property. On a more positive note, if you’re hoping to move soon, you could find that house prices fall (although incrementally).
How to protect your finances during stagflation
Navigating stagflation may require a proactive approach. While the economic outlook may seem uncertain, exploring these strategies as part of a well-advised financial plan can help to safeguard your wealth.
It’s particularly important to heed the advice of your planner during times of uncertainty, so be sure to discuss your options with a professional before taking any action.
Here are a few strategies you might wish to explore.
Reviewing and diversifying your portfolio
Take a close look at your investment portfolio and consider where you could diversify your holdings across different asset classes if you haven’t done so already.
This could help you weather any shocks from economic uncertainty. It may also help to review your risk tolerance and reduce your overall portfolio risk if you feel you need to.
Strengthen your emergency fund
An emergency fund could be invaluable during periods of economic instability and typically consists of keeping 3 to 6 months’ worth of living expenses in an easily accessible savings account. This can provide both a financial and emotional safety net in the case of unexpected job loss, private medical expenses, and other financial emergencies.
If inflation rises, the real-terms value of your emergency fund may decrease. So, it’s worth topping up your fund if possible, to ensure it could cover any unexpected costs.
Exercise caution with major purchases
Where possible, it may help to carefully consider large purchases, whether you’re looking at a new car or property. Higher levels of inflation may cause interest rates to rise, which can make the cost of borrowing money more expensive.
Discuss major purchases with your planner before moving ahead to ensure they align with your long-term financial plan.
Maintain a long-term financial plan
It’s important to stick to your long-term financial plan, especially during periods of economic volatility.
Investment markets have a way of bouncing back, and historically, the accumulation of “good days” often outweighs the effects of “bad days”. For this reason, it may be better to avoid making impulsive decisions based on short-term market fluctuations if they occur due to stagflation.
Plus, it’s crucial to remember the big picture – the UK has experienced slow economic growth for some years now, and this doesn’t mean all your plans need to be revised. Always discuss any adjustments you want to make with your financial planner. Together, you can review your plan and ensure that everything is on track and as it should be.
Get in touch
For expert guidance in light of economic uncertainty, email enquiries@metiswealth.co.uk or call 0345 450 5670 today to find out what we can do for you.
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.
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.
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.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.