You’ve likely heard a lot about rising inflation and how it could affect your finances over the last few years. This is because unexpected global events such as the Covid-19 pandemic and the war in Ukraine caused a significant increase in the cost of goods and services.
While inflation has fallen recently and the Office for National Statistics (ONS) reported that it was 3.4% in the 12 months to February 2024, it’s still higher than the Bank of England (BoE) annual target of 2%.
Additionally, the UK fell into a technical recession at the end of 2023.
The combination of a stagnating economy and high inflation is known as “stagflation”, and it could affect your wealth.
Read on to learn more about what stagflation is and how you can protect your assets.
The UK fell into a recession at the end of 2023
High inflation and rising prices have put pressure on many people’s household budgets. Additionally, rising interest rates in response to inflation have made borrowing more expensive and homeowners could face higher mortgage costs.
As a result, lots of people have cut their spending and the economy has slowed down. In fact, according to the ONS, Gross Domestic Product (GDP) fell by 0.1% between July and September 2023 and 0.3% between October and December 2023.
The economy shrinking for two successive quarters like this means the UK technically fell into a recession.
While the ONS estimates that the GDP grew by 0.2% in January, this is only a small increase and the economy is still stagnating.
The following graph demonstrates the significant economic downturn caused by the Covid-19 pandemic and the slow recovery in the months and years afterward:
Source: ONS
As you can see, after an initial recovery, growth plateaued throughout 2023 and into 2024.
This stagnating economy could affect your earning potential. For instance, if the business you work for is struggling to maintain its profits, your employer may be less likely to give you a pay increase. Similarly, if you are searching for a new job, you may find there are less positions available.
If you’re a business owner, you may be feeling the pinch, too, as consumers are more cautious about their spending.
Unfortunately, inflation still remains at 3.4% in the 12 months to February 2024. This means that prices have continued increasing but, due to the slowdown in the economy, your earnings may be less likely to rise with inflation.
This combination of a shrinking economy and high inflation may seem like a theoretical impossibility as you might associate a slowdown in the economy with falling prices. Yet, as we have seen in recent months, unique circumstances can cause prices to rise, even when the economy is stagnating.
The resulting stagflation could be a “perfect storm” for financial hardship.
Fortunately, we may be coming out of this situation as rising interest rates take effect, causing inflation to fall. Additionally, the ONS predicts that the economy grew by 0.2% in January 2024, so this period of stagflation may be over soon.
In the meantime, it could still be beneficial to adjust your financial plan to protect yourself from stagflation and prepare for a similar situation in the future.
Here are five ways you can potentially do this.
1. Adjust your budget
A period of stagflation will likely affect your outgoings. Inflation and high borrowing costs could mean that your monthly expenses increase over time. Yet, a slow economy might mean that your earnings don’t rise to help you account for these extra costs.
Consequently, you could find it more difficult to pay your general living expenses and work towards other goals such as saving in an emergency fund or investing for the future. If you neglect these goals now, you may find it harder to achieve your desired lifestyle in retirement or protect yourself against financial shocks.
As such, it’s important to consider your priorities and possibly find ways to make savings in your budget during a period of stagflation, so you can still achieve your financial goals.
2. Maintain your emergency fund
Your emergency fund is an important buffer that allows you to absorb unexpected costs without having to rely on borrowing.
This may be especially important right now if stagflation puts extra pressure on your household budget. Additionally, any services you may need to pay for including home repairs or car maintenance could be more expensive than they have been in the past.
Fortunately, maintaining a healthy emergency fund could help you manage these costs more easily. That’s why now may be a good time to review your savings and consider topping them up, if possible.
3. Consider diversifying your investments
Investors often panic during an economic downturn as they might see the value of their investments fall. It’s important that you trust in your financial plan and don’t make any reactionary decisions, as markets typically correct themselves over time.
That said, you may want to consider diversifying your investments and managing the level of risk you adopt. This may give you some protection against stagflation and economic uncertainty as your gains from certain investments could balance losses elsewhere.
Investments that generate an income from dividends could also help you top up your earnings, potentially making it easier to keep up with rising costs.
4. Avoid taking on too much debt
It’s common for people to take on additional debt during a period of stagflation. For example, business owners might borrow money to keep the company afloat in a slow economy or individuals may rely on credit cards to pay increased living costs.
In some cases, it’s difficult to avoid taking on more debt and, when managed in the right way, it could be beneficial. However, it’s important to consider how necessary a potential debt is because the cost of borrowing remains high.
You might find that you can adjust your budget or use emergency savings instead of credit cards to cover rising bills, for example.
5. Seek professional advice
If you are concerned about the effects of stagflation on your wealth, you may want to seek professional advice.
We can help you review your budget and emergency savings, making any necessary adjustments. Additionally, we can give you guidance about diversifying your investments or managing debts.
With our support, you can protect your wealth and continue working towards your financial goals during a period of stagflation.
Get in touch
If you need support with the effects of inflation or a stagnating economy, we can help.
Please give us a call on 01276 855717 or email info@braywealth.com today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
Approved by the Openwork Partnership on 12/04/2024
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