Rising inflation and weak growth have left economists fearing the spectre of stagflation could rise again. But what exactly does that mean?
With the Iran conflict lifting prices and hampering global growth, economists have started to suggest the spectre of stagflation could reappear. But what is it, and why does it matter?
Stagflation is when an economy faces the triple threat of rising inflation, weak economic growth, and a weakening job market.
Whenever stagflation is brought up, the 1970s are usually offered as the classic example. Here, a shock oil price increase started by war in the Middle East and an oil embargo led to a jump in inflation. Inflation rose to 12% in the US in 1974, and many economies experienced a severe recession.
These days, such extremes are considered to be less likely. While the 1970s and today both feature oil price shocks, the context is different. In the 1970s, the global financial system set up after WW2 which tied the US dollar to the price of gold (known as the Bretton Wood system) had just ended, and there were already growing inflationary pressures. Importantly, today’s central bankers have learned the lessons of the mistakes of their 1970s forebears – such as the role monetary policy plays in inflation movements, and taking early action to reduce the prospects of a sustained and significant rise in prices. This should, in theory, lead to better decisions by central banks.
Certainly, they were more aware of these risks when rising inflation met slower growth in 2022. Unlike in the 1970s, this time banks increased interest rates quickly to combat inflation far sooner, albeit at the expense of growth. They also gave more helpful forward guidance than in the past. While these decisions may have caused their own issues for investors in the short-term, the pain was much more short lived than in the 1970s.
The recent conflict in Iran has sent costs of certain items shooting up. The price of a barrel of Brent crude oil, for example, soared from $72 the day before the conflict started at the end of February, to over $112 by the end of March.1 Gas prices increased by even more. Fertiliser prices have also risen substantially. All this is leading to inflationary pressures.
Turning to growth, the UK economy grew at an estimated 1.4% in 2025 and 1.3% in 2024. Since the Iran conflict began, forecasts for UK growth have fallen. For example, the Organisation for Economic Co-operation and Development (OECD) recently predicted that UK GDP would grow just 0.7% for 2025 (but rising to 1.3% in 2027) – laying much of the blame for the slowdown squarely on the consequences of the Iran conflict. Inflation is also expected to pick up, rising from 3.4% in 2025 to 4% next year according to the OECD.
In other words, the UK is expected to see rising inflation and falling GDP growth over the rest of the year. In effect, stagflation, albeit much milder than the 2022 experience.
As we’ve seen in recent years, high inflation isn’t always a problem for businesses – if consumers can pay more, costs can often be passed on through price increases. However, when the economy isn’t growing, and consumers are already feeling strained, there is less capacity to pass on costs without lowering demand. This is how stagflation can start to cause downward pressures on company bottom lines.
For central bankers, it presents something of a conundrum. When inflation is high, the typical reaction is to raise rates. Doing so makes borrowing more expensive, thus slowing down demand. This usually causes inflation to fall (prices rise more slowly) as a result.
On the other side of the coin, when inflation is lower, and a bank wants to promote growth, one tool at its disposal is cutting interest rates. Cheaper credit allows for more spending, and this can help power an economy. Before the Iran conflict, most Western banks had been cutting rates for this reason.
But in a stagflationary period, neither option is without issue. Lifting interest rates when growth is already low might push an economy into a recession. Leaving them unchecked could see inflation spiral out of control.
As a case study for investors, the 1970s episode makes for uncomfortable reading, as it proved challenging for both equities and bonds. The S&P 500 peaked in late 1972 before falling sharply, and didn’t fully recover until 1980, for example.
There is no doubt that periods of stagflation can create a difficult environment for investors. However, the financial market implications are heavily dependent on a range of different factors including the prevailing economic backdrop, the role of the central bank and the condition of the labour market, amongst many other things. There is no certainty over how asset classes will respond to an environment of lower growth and higher inflation.
According to Schroders, when analysing stagflationary periods over the past 100 years, the median yearly real return (in other words, returns after considering inflation) in a stagflation-year was about 0%.2
In a normal environment, investment returns would typically hope to beat inflation, however – given the notorious challenges stagflation presents – more or less keeping up with inflation is hardly a disaster.
If the alternative is keeping money in a cash account, it’s worth considering whether your bank or building society is paying enough interest to meet inflation. In a high-inflation environment, the purchasing power of any cash not earning returns can degrade relatively quickly.
The Schroders research found that in about half of years with stagflation, equities offered a positive return.
A key caveat here is that during these periods, markets tend to experience significant volatility. When returns were positive, they averaged 16%, but when they were negative, they averaged -14%.
The impact of stagflation would also be dependent on how widespread it is. For example, limited stagflation in the UK would have very different investment implications compared to if these issues manifested across other major developed markets.
Stagflation doesn’t happen in a vacuum. The events causing stagflation will also affect markets. Markets have struggled so far this year due to what is happening in Iran, but it is impossible to know how these events will play out. What will the peace look like? Will there be regime change in Iran, or will some sort of compromise be reached? We believe that the best way to navigate such uncertainty is to maintain a disciplined and globally diversified long-term approach.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
Investing does not provide the security of capital associated with a deposit account with a bank or building society. However, please bear in mind that over the long-term inflation will erode the purchasing power of your capital.
Sources
1Bloomberg, 27/03/2026
2Schroders, What does stagflation mean for equity investors?, 26/03/2026. For the purposes of research, Schroders defined stagflation as real gross domestic product (GDP) growth below the previous 10-year average and Consumer Price Index (CPI) inflation above its 10-year average.
SJP Approved 16/04/2026