Client Login
Seasoned investors know to avoid the news cycle if they’re looking to stay focused on long-term returns. There’s a lot of noise and speculation and the daily fluctuations can leave investors worrying about the future performance of their funds.
However, the news cycle can give us a good indication of near-term realities, like the cost of borrowing money and our relative purchasing power. So far in 2025, the UK consumer has felt the icy draught of a slowing economy and stubbornly high prices, a phenomenon known as stagflation.
Where does stagflation come from?
The phrase was coined in the 1960s by Iain Macleod, a Conservative MP, because it described a period of stagnant economic growth, elevated unemployment and high inflation. It’s particularly interesting to economists as it goes against the conventional wisdom of the Phillips Curve, which suggests economic growth and inflation are inversely related – i.e. if you have one, then you can’t have the other.
Fast forward sixty years and the UK presents a slightly different picture. We have a stagnant economy and high inflation by historic standards, but unemployment remains low. Of course, it depends which way you look at it, but unemployment measured by the percentage of those looking for work who are unemployed is low, boosted further by lots of retirements immediately after Covid-19. The government is clearly looking to move many off the welfare bill and into employment to balance the books overall, which could in turn raise the official unemployment count.
Why is stagnation a problem?
Traditionally, in periods of sluggish growth, central banks lower interest rates to encourage consumption. This tends to increase spending and deliver economic growth. However, in a staglaftionary environment, lowering rates can cause prices to rise further, exacerbating inflation, so all growth is swallowed by inflation, and nobody feels any better off.
How have economies emerged from stagflation?
The need to balance the books is hindering attempts by Rachel Reeves to stimulate growth. Indeed, there’s a mismatch between the rhetoric and the actions the government has taken. Encouraging employers to create jobs has been negated by the rise in National Insurance Contributions and the planned introduction of legislation designed to strengthen workers’ rights.
Ending the ‘non-dom’ tax regime and increasing the rate of capital gains tax (CGT) on investments and business sales is also seen as anti-entrepreneurialism.
However, she knows that increasing output and productivity without causing prices to rise through simply lowering the central bank interest rate is the key to emerging from stagflation.
It’s true that many of the forces of inflation globally are well outside of Mrs Reeves’ control (Russia’s continuing war in Ukraine and President Trump’s planned tariffs and the lingering impact of Covid-19) but creating the conditions for growth in the UK is her remit. That’s why we’ve heard her challenging regulators to deliver a plan to cast the shackles off the industries they regulate to encourage growth, courting the likes of China, and announcing large infrastructure projects like an extra runway at Heathrow.
There has also been a step-change in the tone that the government uses on a daily basis. There’s less bemoaning the state of the public finances and more futuristic talk of a vibrant economy.
How does stagflation affect financial planning?
Stagflation itself isn’t reason to delay living your life and executing your plans. However, it’s important to bear in mind that purchasing power is unlikely to improve in the near term and the cost of borrowing might stay higher for longer.
Maintaining a diverse investment portfolio is essential. There are plenty of industries, companies and countries that are not feeling the effects of inflation or stagnation to the same extent as the UK and the Eurozone. It’s really important to separate the emotions we have as a UK consumer and where our investments are focused and where possible, allowing investments to make gains that will pay for tomorrow, when hopefully, stagflation is in the rear-view mirror.
The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
The content of this article is for information purposes only and should not be viewed as a recommendation to purchase any product or service. You should always take advice from a professional before deciding to invest capital.
