How you can protect your wealth from “stagflation”

Over the last few years, inflation has been dominating the headlines, especially with the Office for National Statistics revealing that the Consumer Prices Index (CPI) rose to a 40-year high of 11.1% in October 2022.

Thankfully, inflation has since eased, with the same source reporting that the CPI grew by 2.8% in the 12 months to February 2025.

While this is a considerable drop, inflation still remains above the Bank of England’s (BoE) target of 2%.

In response to this and other economic factors, the BoE recently halved its economic growth forecasts for the year. It lowered its growth expectations from 1.5% to 0.75% in February 2025, the BBC explains.

Even more recently, in early March, the BBC reported that the economy shrank by 0.1% in January 2025. This weak performance demonstrates that the BoE’s revised forecasts are likely to be more accurate than its previous predictions.

This combination of a stagnating economy and persistent inflation is often referred to as “stagflation”, a term you might have seen in the news recently.

If you’re wondering how this might affect your finances, continue reading to find out how stagflation works, and some ways to protect your wealth.

“Stagflation” refers to high inflation during a period of economic stagnation or decline

Typically, inflation and economic growth tend to move in opposite directions. Inflation often rises when consumer demand is high and drops when the economy slows, since people tend to spend less.

Stagflation defies this pattern, as inflation seemingly remains high despite a lack of economic growth.

Some of the main reasons why stagflation could occur this year include:

• Slow – or even faltering – economic growth, as mentioned above

• Inflation remaining above the BoE’s 2% target

• Supply chain disruptions caused by the war in Ukraine and changing US trade policies

• Forecasts predicting that rising global energy costs will contribute to further inflation.

While stagflation is somewhat rare, it isn’t entirely unprecedented. Indeed, there was a spell of notable stagflation in the UK during the 1970s. Both the US and UK faced rising inflation during this period, partly due to the 1973 Organization of the Petroleum Exporting Countries’ (OPEC) oil embargo.

This caused the price of fuel to soar, stalling economic output and driving up the cost of goods and services.

According to City Index, UK inflation rose from 9.2% in September 1973 to 12.9% by March 1974, all while unemployment was on the rise.

If you’re old enough to remember these events, you might feel reassured that while stagflation could affect the UK this year, it’s often short-lived.

Stagflation could reduce the real-terms value of your wealth

Higher-than-expected inflation is perhaps one of the key drivers of stagflation, and this could devalue your wealth in real terms.

Inflation essentially measures how the cost of living increases over time.

Of course, the more prices rise, the more money you’ll need. For instance, £100 today is unlikely to stretch as far in the future.

The BoE’s inflation calculator highlights this. Goods costing £57.69 in 2005 now cost £100 in January 2025 – a 73% increase over two decades.

If inflation remains above the 2% target – or rises even further – the real-terms value of your savings could decline.

While the current CPI is relatively low compared to its 11.1% peak in October 2022, the BoE still expects it to spike to 3.7% between July and September 2025. Inflation is then expected to gradually fall towards the 2% target by the end of 2027.

What’s more, a weak economy means businesses may fall on hard times. So, while prices rise, you could be less likely to experience a healthy pay increase or bonus from your employer. Employment opportunities could also become less frequent, leading to further financial difficulty for many families. These events may not affect you but overall, when the economy weakens, it may be more difficult for your wealth to outpace inflation.

All this means stagflation could have an effect on your wealth this year.

Investing could protect your wealth from stagflation

Perhaps one of the most effective ways to protect your wealth from the effects of stagflation is by investing.

You may assume that saving your cash and earning interest is just as effective as investing, without the risk.

Indeed, it is true that when inflation rises, the BoE often increases the base rate to reduce consumer demand. While this might suggest that saving money in a bank account is more appealing, especially since a higher base rate theoretically means higher rates offered by banks, they don’t always pass these increases directly to savers.

As a result, the interest you earn on your cash savings might still lag behind inflation, meaning the purchasing power of your wealth deteriorates over time.

Instead, investing in the stock market has historically provided more substantial long-term growth. While past performance doesn’t indicate future performance, data from NatWest shows that global equities have consistently outperformed cash savings over the years.

Source: NatWest

Even though there was a brief dip between 2007 and 2009 during the financial crisis, and a severe dip during the Covid-19 pandemic, global equities have performed better than cash over the long term.

By investing in an adequately diversified portfolio, while keeping some cash spare for emergencies, you have the potential to achieve returns that outpace inflation, helping to preserve the real-terms value of your wealth.

Read more: Exploring the many benefits of a diversified portfolio

Just remember that all investing carries risk, and periods of volatility could affect the overall value of your portfolio.

Though, with the right strategy – and, of course, professional advice – investing could potentially offer an effective way to protect your wealth from stagflation.

Get in touch

If you’re concerned about potential stagflation in the future, we could help you secure some peace of mind by ensuring your portfolio could potentially outpace inflation.

Email info@athertonyork.co.uk or call us on 0208 882 2979 to find out more.

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.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

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.