Cost of living warning as experts fear return of stagflation

The UK could be heading for a period where prices keep rising, but the economy slows down at the same time, according to economic experts.

That worry is driven by higher energy costs from the war in the Middle East, ongoing pressure on household bills, and signs that economic growth is weakening.

This combination is known as stagflation - and it is seen as one of the hardest economic situations for households to deal with.

Experts say it can leave households caught in the middle, facing higher costs without seeing wages or job opportunities improve in the same way.

What is stagflation?

Stagflation is an economic situation where prices are rising quickly, but the economy is not growing properly. At the same time, unemployment can increase or job security can weaken.

Normally, when prices go up, it is because the economy is doing well and people are earning more money. But stagflation is different because prices rise even when growth is slow or stuck.

This is why economists often describe it as a “worst of both worlds” situation.

What does stagflation mean for my money?

For most people, stagflation is something that is felt in everyday life rather than seen in headlines.

It can mean that the weekly shop becomes more expensive, energy bills stay high, and wages do not rise at the same pace as the cost of living.

Over time, this means that the money people have simply does not stretch as far as it used to. Even households that were previously managing can find things becoming tighter month by month.

For some, this can lead to using credit cards more often, dipping into savings, or starting to struggle with essential bills like food, rent, and energy.

Why are experts worried about stagflation now?

Experts are worried because several pressures are building at the same time, even though households are not necessarily feeling them fully yet.

At the moment, energy bills have not risen - in fact, under the latest Ofgem price cap, they have recently fallen. However, energy markets have become more volatile in recent weeks. This has pushed up wholesale gas and oil prices, which are the underlying costs that feed into future bills.

The key point is that there is usually a delay between changes in wholesale energy prices and what households actually pay. So even if costs rise in the background now, it may not be reflected in bills until the next price cap period, likely from July onwards.

At the same time, there are signs that economic growth is slowing. This means businesses may be less likely to hire staff or increase wages, which can weaken household finances further.

When prices are expected to rise while growth is weakening, it creates the conditions economists describe as stagflation.

Why is stagflation so hard to fix?

Stagflation is difficult to deal with because the usual tools used by policymakers can have mixed effects.

For example, raising interest rates can help to bring inflation down, but it also increases the cost of mortgages, loans, and credit. That puts more pressure on households already struggling.

On the other hand, measures designed to boost the economy can increase spending, which can push prices even higher.

This leaves policymakers with a difficult balancing act, where every option carries some level of risk for households.

What can the government do to help?

There is no quick fix for stagflation, but governments can try to reduce its impact on households.

This can include targeted financial support for those on lower incomes, help with energy costs, and policies aimed at improving long-term economic growth and job opportunities.

The Bank of England may also adjust interest rates in an attempt to control inflation, although these changes usually take time to affect everyday prices.

What does this mean for households?

For households, the biggest impact is likely to be continued pressure on everyday budgets.

If wages do not rise in line with costs, many people may find it harder to keep up with bills and essentials. Even small price increases can make a big difference when money is already tight.

The most important thing is to act early if money starts to feel stretched, rather than waiting for problems to build up. If you're worried, get in touch with us. We can review your budget and help you stretch it further. And if you’ve already fallen behind, we can help find the right solution for you.