One of the most depressing words in economics has reared its ugly head again. Stagflation is looking like a real possibility. So, you’ll probably see the term cropping up a lot over the next few months.
But what the heck does stagflation even mean? And what could this unfortunate word mean for you and your finances? Here’s what you need to know.
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What is stagflation?
Stagflation is a situation that occurs when the level of inflation in an economy is rising but economic growth is slowing and unemployment levels are high. It’s a complete trifecta of bad news for an economy.
I have to be honest, when I first heard the word, I thought it must be referring to some kind of inflatable deer. The actual definition isn’t so cute. The ‘stag-‘ part refers to a stagnant economy and the ‘-flation’ part is a nod to rising prices.
Stagflation can arise for a number of reasons. Right now, it appears to be caused by a bad cocktail involving:
- Supply chain issues
- Worker shortages
- Low interest rates
- Commodity scarcity
This dilemma presents a unique problem. That’s because using measures to reduce inflation could further hinder growth and keep employment levels low. It’s a real conundrum!
How might stagflation affect the UK economy?
It seems like interest rates are going to remain low. This is no surprise because central banks like The Bank of England are confident that rising inflation is just transitory. They think that similar to a spot of bad weather, rising inflation will ease and blow over.
A slowing UK economy isn’t necessarily a bad thing. There’s been a lot of stimulus and money pumped into the economy since the beginning of the coronavirus pandemic. When it comes to stimulating an economy, there are limited options. One of the main tools is the ability to raise interest rates. But if that’s not going to happen, then we’ll just have to see how things play out.
Trying to keep the economy stable is like the story of Goldilocks and the Three Bears. Increasing stimulus and raising interest rates can create too much heat. While this can be good for growth, it also creates higher levels of inflation. Too little involvement can lead to a cold and stagnant economy. The UK financial system is a lot more complex than a bowl of porridge, but that’s the basic gist of a Goldilocks economy.
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How would stagflation impact your finances?
It wouldn’t be ideal. If inflation keeps rising, it’ll mean you’ll be able to buy less with your money. Even the best savings accounts are paying low levels of interest, so it’s difficult to beat inflation when your money is sat in the bank.
However, if interest rates stay low, you’ll likely have the benefit of paying less interest on your mortgage. It’ll also mean you can get a better deal when borrowing money with longer interest-free periods on top-rated credit cards.
High unemployment levels might not directly affect you right now. But a shrinking economy can lead to further job losses as companies tighten up and reduce costs where they can. Fewer people with jobs also means less tax is being paid and less money is being spent. This could end up affecting you even if your job is secure.
Should you be worried?
Wider economic issues like this are hard to control. There’s nothing that you can do on a personal level to prevent or accelerate the possibility of stagflation.
By keeping on top of your whole financial situation, you’ll be in a good spot to ride out any economic troubles. Here are a couple of practical steps to take:
- Concerned about your cash losing value? Keep an eye out for the best saving rates or consider investing.
- Worried about employment? Try and learn new skills whenever possible to make sure you bring value when finding your next job. Or even consider a side hustle to diversify your income.
