If you’re a dedicated follower of fashion, you may already know that the 1970s craze of flared trousers is going to be on trend in 2023. According to Hello and other fashion magazines, bell-bottoms have made something of a comeback and they’re likely to be a much more common sight this year.
While 1970s fashion may be something you are pleased to see, there may be something else that featured heavily in the 70s, and something that you’re very unlikely to welcome: stagflation. This financial anomaly happens when inflation is high, as it is at the start of 2023, and the economy is struggling or suffering a downturn.
Read on to discover more about what stagflation is, why it could jeopardise your wealth in real terms and how a financial planner could help you protect your money from its effects.
Stagflation refers to high inflation during an economic downturn
The word “stagflation” fuses the words “stagnation” and “inflation”. Stagnation refers to slow or non-existent economic growth, with the latter referring to high inflation, something that was hardly out of the headlines during the last year or more.
What makes stagflation so rare is that, typically, inflation and economic stagnation are inversely related. Inflation is normally driven by consumer demand, which tends to drop during an economic downturn as households don’t have the money (or confidence) to spend as much.
As a result, inflation typically falls during an economic downturn. When stagflation happens, inflation remains high, despite an economic downturn or recession.
In the 1970s, when the UK last struggled with severe stagflation, economic activity dropped significantly and inflation rose to an incredible 22.6%, the Office for National Statistics (ONS) reveals.
High inflation and a slow economy could result in stagflation in Britain
According to official figures, inflation stood at 10.4% in February 2023.While this was lower than the 40-year high of 11.1% it reached in October 2022, it’s significantly higher than we have been used to in recent years.
While the Bank of England (BoE) predicts that inflation could fall to around 4% by the end of 2023, it doesn’t see it dropping until the second half of the year. As a result, it might remain high for some time to come.
The other reason we could see stagflation in 2023 was highlighted by the Guardian newspaper. It reported a warning by the International Monetary Fund that Britain might be the only G7 nation that could fall into a recession this year.
According to the Independent, the BoE also believes Britain could be heading for a recession, albeit a much shallower and shorter one than many had feared. Even so, the evidence suggests that the UK could experience stagflation in 2023.
Stagflation could reduce your wealth’s value in real terms
A key driver of stagflation is high inflation, which has the potential to effectively devalue your money.
This is because inflation measures the rising cost of living over time, which means that £100 today is likely to buy you more than it will in the future. If you use an inflation calculator, you’ll see that you need £203 in February 2023 to have the same spending power of £100 in February 2003.
This means that your money needed to grow by 103% to keep pace with inflation, which averaged 3.6% a year during the period. If it didn’t, it would be losing spending power, which means your money is reducing in value in real terms.
Historically, when inflation rises, interest rates are increased to help keep it under control, as higher interest rates also reduce consumer demand. As higher interest rates make borrowing more expensive, mortgage repayments for millions of homeowners with certain types of mortgage also rise.
This is why the BoE increased its interest rate to 4% in January 2023, the 10th consecutive increase in a row. While you may think that higher interest rates mean your money could be earning enough in savings accounts to keep up with inflation, in reality, it may not be.
Investing may help protect your wealth from the effects of stagnation
An article by the Times in February 2023 suggests that the top rates being offered by banks haven’t kept up with all of the BoE’s increases. This means that the interest being offered for savings accounts is likely to be significantly lower than February’s inflation rate of 10.4%
There is good news, though, as historically, investing in the stock market has tended to produce greater long-term growth than savings accounts. This is backed up by a study carried out by Schroders, which revealed that between the start of 1952 and the end of May 2022, UK equities returned 11.7% a year on average. This compares to cash, which returned 6% a year.
With this in mind, investing your money to help protect it from the effects of inflation might be something you want to consider. Please remember that past performance is no guarantee of future performance.
Get in touch
If you would like to discuss stagflation and how you might be able to protect your wealth from its effects, or investing and your finances more generally, please contact us on hello@ardentuk.com or call 01904 655 330.
As an award-winning financial advice company that was a 2022 VouchedFor Top Rated firm, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.
Please note
This blog is for general information only and does not constitute advice. 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 information is aimed at retail clients only. Life insurance 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.
