What would the return of stagflation mean for savers and investors?

Added: 2026-05-31

[00:00:04]Welcome to this Killick explains video.

[00:00:06]And welcome to a pretty topical one in the volatile world geopolitically in which we seem to exist with events going on in Ukraine, the Middle East, and so on. And that is what would the return of stagflation, whatever that is, mean for savers and investors? Now, what would, deliberate choice of wording, we're not there yet, arguably, but a lot of commentators are saying we might be headed it there. So, what is it? And what is it about it that people don't like? And therefore, what should you be thinking about if it happens?

[00:00:39]So, with no more ado, I'd like to open with a quote, as you know, so here's one.

[00:00:45]All right, this is not from yesterday, as you imagine. This is a former Chancellor of the Exchequer, Iain Macleod, who uh confronted this problem.

[00:00:52]Says it's not particularly common, this situation here when you're else, but it could be coming back to haunt us. We now have the worst of both worlds. This was his description. Okay? Not just inflation on one side or stagnation on the other, but both of them together.

[00:01:06]And you don't really want both of them together for reasons will become apparent in a moment.

[00:01:13]Now, therefore, you know, what is stagflation? Well, it's a nasty combination. It's the clues in the name, if you like. It's when you've got basically stagnant growth and inflation.

[00:01:36]All right, we'll look at some places you can capture this data in a moment. So, how would you know it's happening? We'll look at that in a moment. But stagnant growth and inflation. All right, and basically this is quite a tough combination to deal with. All right? If you're a central bank, inflation or deflation, okay, normally come with growth or lack of growth, if you like, and central banks can then step in to counter it. But this stagflationary situation is kind of checkmate, some people would argue, if you're somebody or an organization like the Bank of England.

[00:02:12]So, it also has implications for savers and investors, we'll come back to in a moment.

[00:02:17]The reason it's a headache is this. Um if you're a central bank, you can say, well, you know, if I've got low growth, I've probably got low inflation.

[00:02:35]So, I can stimulate the economy. All right? Um now, the reason for that is quite simple, if you think about it. If growth is low, what does that actually mean? It means people aren't spending money, people aren't feeling confident, they're not getting good wage rises, maybe they're losing their jobs, businesses are not investing. Okay? So, the the basically the economy is sort of contracting, and that's going to have the effect normally of pulling down inflation. Because what is inflation?

[00:02:58]It's a representative number of the cost of a basket of goods and services across the economy. Well, if people are feeling, you know, lacking in confidence, businesses lack confidence, you'd normally expect that to sort of act as a drag on prices. So, if you're a central bank, you can say, aha, well, okay, so what can I do about this?

[00:03:15]Because my you know, if they they they have a central bank's a mandate. So, let's say their mandate is to keep inflation at about 2 and 1/2%. All right?

[00:03:26]Why not zero? You don't really want zero. You want the economy to be growing, but you don't want it running out of control, cuz that makes wage negotiations a nightmare. It means people suddenly can't afford stuff. So, a bit of low inflation is a good thing.

[00:03:39]So, you think, well, how are we going to, you know, if if inflation is starting to dip below that number, the the economy is is basically crumbling, what can we do? And the answer is they can cut interest rates and or use other tools like quantitative easing. All right? So, and we've seen this in the past, by cutting interest rates, hang on a minute, what's that going to do? If you cut interest rates, the idea is supposed to be that means that people will be spending less on their mortgages, cuz presumably those rates will come down, too. All right? It means people will feel less like they want to save money, cuz why would you if interest rates are being cut? All right? So, net effect, people feel like they've got more money to spend, all right? And they don't want to save as much anyway, they've been incentivized to save. So, they start spending money, businesses can borrow cheaper, so they start spending money and investing, and you get growth back.

[00:04:34]All right, that's the theory.

[00:04:35]Now, central banks can deal with that.

[00:04:37]Or, you know, they're also not too bad in theory at saying, well, if we've got high growth and higher or rising inflation above that target of 2 and 1/2%, let's say.

[00:04:55]All right? Well, that's okay, you know, we we can deal with that. We can make sure things don't run too hot, as they say. Cuz this is what what's happening here? Well, it's the economy getting confident, it's people spending money, pushing up prices for goods and services, cuz more people are competing to buy them. It's businesses investing.

[00:05:14]Where right, you know, wages are rising, good situations. That's going to start pushing up prices, and central bank can say, well, I know what we need to do then is to cut that off a bit, just make sure it doesn't run too hot, get too far ahead of itself.

[00:05:27]So, they can push up interest rates and or stop doing quantitative easing and engage in something called quantitative tightening. This is just a sort of a technical way of stimulating the economy. This is a way of reining it back in again. The interest rates is the main weapon. That's the one most people respond to, that's the one that gets covered in the media. So, what's happening here? The idea is we don't want inflation to get to, you know, 12 and 1/2%.

[00:05:52]That's a nightmare, cuz then suddenly people want massive wage rises, it all gets a bit out of control.

[00:05:57]So, we want to rein it in. All right?

[00:05:59]So, if we raise interest rates as a central bank, what's that going to do?

[00:06:02]It's going to make people's mortgages more expensive. It's going to incentivize them to save a bit more, arguably, cuz interest rates go up across the board. And those two things might start getting them to cut back on the amount that they spend on goods and services. All right? So, you can see if you're a central bank, you can stimulate the economy with that combination, you can rein it back in again. I mean, it's a fairly crude lever, it takes a while to work, the interest rate lever.

[00:06:27]Now, problem is, as, you know, what do you do? It's kind of the checkmate situation is when you've got this, low growth, with that, high inflation. All right? What do you do now?

[00:06:42]Do you cut interest rates? Now, there's a big debate going on about this, by the way, between central banks at the moment. What do you do? You know, if oil is going through the roof and pushing inflation up even as Western economies are sort of stagnating, cuz people are feeling under pressure, job job insecurity, all the rest of it.

[00:07:03]What do you do? Cuz in theory, if oil prices push inflation up, you've got to raise interest rates to cut that off.

[00:07:09]But if you do that, you're going to crush the economy.

[00:07:12]Yeah? You're going to make it even worse. So, it is a kind of checkmate situation. Stagflation is that, hmm, as a central bank, what's the right thing to do? Cut rates? Hmm.

[00:07:23]Sit on them?

[00:07:24]Raise them to counter inflation? Tricky.

[00:07:32]Now, if we get this slightly tricky scenario, how's it going to affect savers?

[00:07:38]Bit of a mixed picture, arguably. So, um if you're a saver, if you're a a a consumer, I should probably have said, you're probably worrying about two things, which are directly affected potentially.

[00:07:53]One is your mortgage, most people have one.

[00:07:57]And the other is savings rates.

[00:08:04]All right, now this is why it's tricky for central banks. Um if you've got stagflation, so you've got low growth, but high inflation driven by oil price increases, among amongst other things. But don't forget, people say, well, oil is it just oil prices? How come it has such an effect?

[00:08:17]It's a ripple effect, right? Cuz rising oil prices affect the price of food, transport, what's going on in the Middle East, straight up oil moves affects the price of all kinds of things. It's like a knock-on effect. So, it's oil and other stuff getting more expensive. You know, some people are forecasting double-digit food price inflation in the UK because of the constraint on supply and transport. So, question is, if interest rates are rising, you could say, well, if I can afford to save, that's good.

[00:08:46]That's a better return, presumably, on my bank accounts and and so on. But it's not so good news over here.

[00:08:53]And we've already seen some of this, because lenders will start pushing up mortgage rates in anticipation of interest rate rises in a stagflationary scenario. Now, if you are a saver, the other thing I would say is you might think, well, that's great. I mean, let's say let's say I can now get 5% on my savings account, whereas 6 months ago I didn't get only get three.

[00:09:16]But don't forget about what I call real returns, cuz don't forget, we're talking about an environment in which inflation is also rising. So, you know, if inflation is 4% and your bank account's paying you five, you're only getting a real return, it's called, of what? And that's what I mean by an inflation-adjusted return. So, it's not even the case that a stagflationary environment is round of applause for savers, because it's all a question of is the rate you're being offered keeping pace with, indeed exceeding, uh the inflation rate. And that makes the case, by the way, for making sure, at the very least, that money you are saving is being saved tax-efficiently.

[00:09:54]So, again, goes back to another video I made recently. Think about when you use up those ISA and JISA allowances.

[00:10:07]All right, investors. Now, I I want to put something up I put up in another recent video. So, for investors, um you know, at the moment there's a lot of debate about this. Um there is a thing called the triple threat out there if you're a doom monger. And the triple threat is geopolitics, all right, what's going on in the Middle East, Ukraine, and so on, and the effect that could have on prices and inflation and growth, interest rate policy, and so on. There is the end of the AI boom, if that's what you think's going to happen, or if you don't think that's what what's going to happen, the impact that AI is having on traditional industries in terms of sifting through them, removing jobs, changing the way things happen. And there's all the creakiness coming out of the private credit markets. That's the sort of hidden part of the debt markets, and there's quite a few bankruptcies and quite a lot of noise coming out saying maybe that's gone too far too fast as well. All right, so for investors, you know, if you're trying to make sense of all of that, just be careful not to do anything too knee-jerk. And I've made this point in another video.

[00:11:10]So, over over here, if I was to put AI and tech stocks and funds, and over here what some people have called halo, high asset low obsolescence, or more defensive or old economy stocks.

[00:11:33]All right, the sort of stuff that you need day in day out, you know, water companies, energy companies, uh mass retailers, food retailers, and so on. Um what I wouldn't do in a stagflationary environment, or in any environment, is just go, "Right, for whatever reason, that's that's not looking so good. Okay, the hyperscalers have gone too far with their data center build-out, or they haven't, but the effect of AI is going to be to trash lots of software stocks for goodness' sake in the tech space. So, what I'm going to do is head over here."

[00:12:05]All right.

[00:12:06]I'm going to convert my portfolio from that to that.

[00:12:11]Halo, defensive, old economy, safer, won't change much, steady as you go type stocks. Okay?

[00:12:18]It's nuanced. So, you know, in any given market cycle, uh where you want a portfolio to sit will be somewhere between the two.

[00:12:33]Not necessarily exactly halfway. But, as market cycles ebb and flow, what I'm suggesting is, yeah, where you are on this spectrum will move. Be But, it's not never going to be right over there. There's never going to be either, even if you're a massive tech fanatic, right over here. Both are dangerous positions to be in. Uh where you might end up is what um a colleague of mine has called in a sort of tech plus portfolio, which acknowledges the best parts of that without dumping the best parts of that. All right. And if you think about it, stagflationary environment, you know, so suddenly you've got oil prices rocketing.

[00:13:16]You know, high oil prices, what's that good and bad for? Well, if oil's rising, that's actually not so great for that lot.

[00:13:29]Whereas, frankly, less relevant for these stocks if you think about what they are. Okay, they're much less dependent on oil. All right.

[00:13:37]And you've also got to think about, and this this is another nuance. There are lots of nuances in this environment. If inflation's on the rise, and if the Bank of England were to raise rates, not a given, by the way, that would tend to push up, all other things being equal, sterling.

[00:13:53]Now, if sterling rises, that's suddenly not so good news for exporters because it makes all our products and services more expensive overseas.

[00:14:00]Okay?

[00:14:01]But, it's good for importers, okay, because it makes the cost of importing what you need to make what you make cheaper. So, exchange rates and interest rates have a bearing. All right, so that could make a case for more domestically based stocks. And we are seeing globally something of a return to reshoring, manufacturing at home, less of the kind of big globalization push, if you like, of the last decade. And that's all encompassed in what I've loosely described as this sort of tech plus basket. Anyway, if you want to find out more about some of these things, I'll give you a source in a moment. So, how do you know you've got stagflation?

[00:14:43]What do you look for? Well, obvious things to look for on the on the is growth fading?

[00:14:51]GDP, gross domestic product numbers, okay? Um keep an eye also on wages and employment.

[00:15:06]Excuse my spelling.

[00:15:07]So, that's at the top, but keep an eye on these two things, all right, because high higher unemployment, rising unemployment, would tend to indicate the economy stagnating, and lower wage settlements would also tend to indicate the same thing. Okay? Over here, you've got the main measure of inflation is CPI.

[00:15:31]There is a thing called um RPI as well, retail prices index, that's slightly older. But, the consumer prices index uh is your kind of inflation snapshot on a basket of goods and services. And what we're saying is, as I say again, just to remind you, stagflation is where you've got that tending to drop, that tending to rise. All right, so keep an eye on both because they influence both how you behave as a consumer and potentially how you might behave as an investor.

[00:16:01]Now, to finish off, for those people thinking, "What was that tech plus thing? You haven't heard that much before." If you want to find out more about what that is, then the spring issue of Confidant is not a bad place to go. Um if you want to see videos on inflation, deflation, stagflation as well, cuz it's not completely brand new, then my library at killik.com/resources.

[00:16:25]And, of course, equity investing and fixed income investing, new guide out this year. Um that would be that middle section there. So, plenty of other places to go to find out more.

[00:16:41]Mhm.