Stagflation is the word economists use - reluctantly - when growth stalls while Inflation refuses to fall. Successive Bank of England Monetary Policy Reports have flagged that another energy-price shock could nudge the UK in that direction. For investors, the implications cut across cash, gilts and equities.

Key takeaways

  • UK CPI inflation peaked at 11.1% in October 2022 (ONS) and has trended down since.
  • The Bank of England's 2% inflation target requires periodic policy adjustment.
  • Stagflation historically punishes long-duration Government Bonds and Growth Stocks.
  • Energy and Commodity exposure can act as a partial hedge.
  • Assets/">Real assets and inflation-linked gilts have a defensive role in some portfolios.

What is stagflation?

The classic definition is high inflation combined with stagnant or falling output and rising Unemployment - last seen severely in the UK during the 1970s.

Why is the BoE worried about energy?

Global gas prices remain sensitive to geopolitics. Ofgem's price cap adjusts quarterly, and a sustained spike feeds through into transport, food and Manufacturing costs.

What might UK investors do?

Diversify across global equities, hold some inflation-linked gilts (index-linked gilts trade actively on the LSE), and consider real-asset exposure such as infrastructure Investment trusts.

What this means for UK investors

Stagflation does not call for panic selling, but it strengthens the case for genuine Diversification - including across currencies, asset classes and inflation-sensitive sectors.

Risks to watch

  • Over-rotating into commodity exposure at cycle highs.
  • Holding too much cash and losing purchasing power.
  • Misjudging duration risk on long gilts.
  • Concentration in UK-only assets if sterling weakens.