Interest rates have been cut to 4.5% as expected but with low economic growth, higher unemployment and price rises, some analysts fear we are heading for a period of ‘stagflation’.
First coined in the 1960s, the term simply means economic stagnation on the one hand and inflation on the other, which is neither beneficial to businesses nor workers.
The Bank of England cut its growth forecast on Thursday along with interest rates, saying it now expects the economy to grow by 0.75% in 2025, down from a previous 1.5% estimate – while inflation is forecast to peak at 3.7% later this year.
Currently inflation is 2.5% but the increase in the National Living Wage and in employer National Insurance contributions coming this April are likely to push inflation higher, among other things. Both measures may be considered ‘good’, depending upon your point of view but they have inflationary consequences.
So what can you do about it and how will it affect you? There’s nothing we can do to change economic policy or global events but we can protect ourselves to an extent – and we can certainly avoid making rash or knee-jerk financial decisions.
It goes without saying that global economics are especially volatile at present – in a week we have gone from the stock markets wobbling due to President Trump’s stance on trade tariffs, to the FTSE100 leaping a favourable 1% to a new peak because the BoE cut interest rates.
On an individual level, people are saving more but they do that when fearing even darker days ahead.
While saving is a good thing, simply throwing your money in a Cash ISA or simple savings account during times of rising inflation and falling interest rates will actually lose you money in real terms. This is because your Pound will buy you less than it would have previously and your ‘investment’ will not grow at all.
We have discussed the alternatives before but there are other areas where you could reasonably expect to see a better return, such as Stocks and Shares ISAs or pensions but of course nothing is without risk or guaranteed, with longer term investments more likely to yield results.
It should also be pointed out that higher inflation erodes the power of pension savings in the same way, as your pot will have less purchasing power.
But if you have money to save or invest, speak to an Independent Financial Adviser (IFA) to learn more about the options open to you.
We are not there yet but higher inflation typically means interest rates will rise to try and combat inflation, so not good news for mortgage owners either.
Unemployment is already rising and vacancies are dropping but at the same time wage growth is way above inflation and in itself, leading again to inflationary increases for us all and remember, this is before the 5.3% April increase in Living Wage, which is much above inflation.
The world is going through a period of ‘interesting times’ and economic volatility, so while it is never truly gloom and doom – and nothing lasts forever in any case – our advice is to avoid making any hasty decisions right now.
Whether that is buying or selling investments, drawing down on a pension lump sum, considering Equity Release (as we discussed last week!) or any major financial or life-changing decision, we strongly advise you to consider it very carefully first.
Do not be afraid to do what is best for you but explore the options and all ramifications fully and most importantly, take professional advice so you do not get stuck in the stagflation quagmire!
