Stagflation: The Bank of England’s latest alert explained

6 March 2025

Inflation has barely left the headlines since the beginning of the Covid-19 pandemic, which has now been going on for five years. The rate of inflation is a numerical indicator of the overall cost of goods and services.

The Office for National Statistics (ONS) says the UK’s rate of inflation had been hovering around 2% for several years before the pandemic, then it increased sharply between 2020 and 2022, peaking at a 40-year high of 11.1% in October 2022.

Between the latter months of 2022 and March 2025, inflation has fallen again, standing at 3% in January 2025 after fluctuating between 1.7% and 2.6% since April 2024.

But remember, prices haven’t fallen; a lower rate of inflation indicates that prices have merely risen more slowly.

For context, the Bank of England (BoE) has a primary focus on keeping the rate of inflation at around 2% – this is its ongoing target rate. This number strikes a balance between allowing prices to rise steadily without putting undue pressure on consumers’ finances.

Despite successfully handling inflation in recent years through a series of interest rate hikes, implemented between December 2021 and August 2023, the BoE’s efforts could be short-lived. While inflation seems to be under control for now, the ONS says that economic growth stood at 0.4% in December 2024, following unrevised growth of just 0.1% in November.

So, on 6 February 2025, the BoE halved its original forecast of economic growth for 2025 and warned that families could face further price rises, the Guardian reports.

In response, the prime minister focused positively on the BoE’s recent base rate cut, which brought the rate to 4.5% in February, saying that lower borrowing costs would “put money in people’s pockets” and help to boost the UK economy.

Nevertheless, could we be heading for a year of stagflation and what does this term mean for consumers?

Keep reading to learn more.

“Stagflation” describes a period of low economic growth and simultaneous price rises

Stagflation comprises two opposing circumstances happening at once: inflation rises, but economic growth and unemployment either remain stagnant or enter a period of decline.

There are two main reasons that stagflation comes about.

1. Supply shock

If there’s a sudden shock to the economy, such as a rapid increase or decrease in the supply or demand of a key product like oil, this can lead to stagflation. While the price of this commodity would rise exponentially, profits might not rise alongside it, causing the economy to struggle.

For example, the combined effects of the Ukraine war and pandemic led to a period of stagflation in 2023, which we wrote about in a blog post at the time.

2. Ineffective policies

In some cases, ineffective or poorly thought-out economic policies can contribute to stagflation.

It would be unwise to place blame on any one government’s actions, especially in light of the pandemic and ongoing political circumstances around the world, many of which have an ongoing impact on the UK’s fiscal situation.

However, the chancellor’s Autumn Budget for 2024, which placed further pressure on businesses, investors, and taxpayers, could have prompted caution and further contributed to the economic circumstances of today.

The Bank of England governor, Andrew Bailey, says today’s situation is more complicated than a simple case of stagflation

Although stagflation could be on the cards for the UK this year, BoE governor, Andrew Bailey, says that “stagflation” is a word “I don’t use”.

Speaking to Channel 4, he says, “I do, unfortunately, think we’re going to see some pick-up in inflation this year, [but] nothing like we’ve seen before […] in the recent past. The major cause of that is energy prices.”

When pressed about the issue of slow economic growth versus rising inflation, Bailey says, “Now, we’ve had weak growth in this economy, in this country, really since the financial crisis. So we’re talking about 15, 16 years. Actions to address growth are very good and very important. But they won’t turn into results next quarter. That’s not going to happen. This is long-term important work.”

With this said, although we could experience stagflation in the UK this year, Bailey’s words could offer some reassurance – the long-term trajectory is of greater importance, perhaps, than the short-term situation the UK finds itself in.

Your financial plan should remain a priority over reacting to media headlines

Turning now to your personal financial plan, you could be worried that slow economic growth, combined with rising inflation, might have an impact.

Firstly, rising inflation – sparked by the increase to energy prices among other things – could mean your annual or monthly budget becomes tighter in 2025. Ensuring you keep on top of your spending and avoiding dipping into savings and investments could keep you on track.

With regards to slow economic growth, business owners and employees could feel the pinch. With a large proportion of business owners being forced to meet the increase in employer National Insurance contributions (NICs), wages and other benefits could stagnate.

All this said, your ongoing financial plan is the priority despite potentially adverse economic conditions. Working with your financial planner, who can provide reassurance in the face of constant worrying media news, might help you remain on the straight and narrow where your wealth is concerned.

This is especially true with regards to the upcoming Spring Statement, which will be delivered on 26 March. The chancellor is set to announce another set of fiscal policies that could affect you and your family. We’ll be publishing a full breakdown of her announcements, and what they might mean for you, on the day.

Speak to us about managing and growing your wealth

To work with our experienced financial planners, email info@depledgeswm.com or call 0161 8080200.

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.