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The cost of living continues to rise, this time exacerbated by the ongoing conflict in Iran.
As you may have read, the cost of energy has gone up in response to the conflict – the UK’s energy price cap will rise by another 13% in July 2026, Ofgem reports.
In better news, the rate of inflation fell from 3.3% to 2.8% between March and April 2026, the Office for National Statistics (ONS) reports. This does not mean that prices are going down; rather, they are going up more slowly. Plus, the full effects of the Iran conflict on energy prices may become evident in the coming months, which could lead to an inflationary spike.
The UK economy has avoided recession in recent months despite speculation that it could enter one. That said, growth remains slow and employment has dipped, falling by 0.3% in the year to March 2026, the ONS reports.
Inflation is nothing new, nor are periods of economic slowdown and sluggish employment.
But one new word you may have seen bandied about in the news is “stagflation”.
Keep reading to discover what stagflation means, how it could affect your wealth in real terms, and what you can do to dampen its effects.
Stagflation describes the “perfect storm” of high inflation and low economic growth
When inflation keeps rising while the economy grinds to a halt – sustained over a period of several months – this is known as stagflation.
Inflation is a metric by which the ONS measures the cost of living in the UK, based on a “basket” of around 750 goods and services, from luxury items to basic groceries.
When costs rise, so does the rate of inflation.
When inflation rises too quickly, the Bank of England (BoE) tends to increase the base interest rate in an effort to curb consumers’ spending power and create greater balance. Its target rate of inflation is 2% a year.
That is why, during the Covid-19 pandemic, the BoE gradually increased the base rate from 0.1% to 5.5% in response to the rapidly increasing rate of inflation, which peaked at 11.1% in October 2022. It has since decreased the base rate to 3.75% but has done so very slowly, in response to the “sticky inflation rate” that has hovered above the target rate of 2% for some time.
In theory, rising inflation should mean that the economy is booming. Businesses can afford to put their prices up, and individuals are earning enough to pay higher prices for the same goods.
But when prices keep rising despite a weak economy – usually due to global circumstances such as the Iran war – your personal finances could feel the impact.
In the first quarter of 2026, real gross domestic product (GDP) rose by 0.6%, up from a revised 0.2% in the final quarter of 2025. Plus, the ONS says that wage growth, when adjusted for inflation minus housing growth, was just 0.3% for regular pay in the first quarter of this year.
So, we are not in a period of stagflation just yet, and may avoid it altogether. Inflation is under control to a degree, and GDP is on a steady trajectory. However, as you read earlier, the knock-on effects of the war in the Middle East may not have been felt in full just yet, and stagflation could occur later in the year.
3 important money management tips to mitigate the effects of stagflation
The UK entering a period of stagflation could mean your money is essentially worth less over time.
Although we aren’t there yet, it is worth protecting your money from the possibility of stagflation. Here are three important tips to follow now.
1. Build your emergency fund
If one or two of the following events happened today, could you comfortably cover the cost without a credit card?
- Your boiler needs to be replaced.
- The clutch on your car gives way.
- Your pet needs emergency surgery.
- You sustain an injury and have to take three months off work.
Some emergencies can be covered by insurance or sick pay, but a payout is not always guaranteed.
Your emergency fund, which should ideally be held in an easy access cash account, is the buffer that could help you maintain financial stability when the unexpected happens.
In a period of stagflation, where prices would likely rise far faster than your earnings, having an emergency fund is even more crucial. We usually recommend having between three and six months’ living expenses saved – and remember to check whether your savings provider offers a competitive interest rate.
2. Avoid sensationalist media
Often, headlines prompt savers and investors into making emotional decisions that don’t fit in with their long-term plan.
For example, when the US invaded Iran, investment markets dipped significantly.
During that time, you may have seen more than one headline about a “market crash” and the “oil crisis”. If you had listened to the headlines, you might have sold off shares for fear of further losses – but markets rebounded quickly and some indices even experienced all-time highs in May and June 2026. In this instance, a knee-jerk reaction would have led you to miss out on significant growth.
The same is true for a period of economic uncertainty, and if you see the word “stagflation” come up in the news, you might assume you need to change your financial tactics, and fast.
When, in fact:
- Emotional financial decisions are very rarely necessary.
- Market and economic fluctuations are normal over the short term – it’s the long-term growth of your wealth that matters most.
Remaining calm and confident in the face of uncertainty, be it market volatility, high inflation, or a slow economy, is likely to serve you well in the years to come.
3. Speak to a financial planner
A financial planner can put concepts like stagflation into the all-important context of your own life.
If you wish to take a proactive approach to growing and protecting your wealth over the long term, speak to our team today to find out how financial planning might help.
Email hello@sovereign-ifa.co.uk or call us on 01454 416653.
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.
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.
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.
Note that life insurance and financial protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.
Approved by Best Practice IFA Group Ltd on 17/6/26