What is stagflation and why does it matter for your pension savings?

The outlook for energy prices in the UK has been very uncertain recently due to the conflict in the Middle East. The UK imports lots of its energy, leaving the economy particularly exposed when energy costs increase. Now, there’s a risk that the UK could slide into a period of stagflation - that’s stagnant economic growth and rising inflation.

Rising energy prices can affect the entire economy, pushing up costs across various industries. When combined with low economic growth, this can spark a period of stagflation.

This isn’t a healthy state of being for an economy. It can also be important to be aware of this when managing your pension, especially if you’re approaching retirement and have plans to withdraw money in the nearer term (from age 55, rising to 57 from 2028).

Find out what stagflation is, and what it could mean for your savings.

Economic stagnation + rising inflation = stagflation

Stagflation is a combination of the words ‘stagnation’ and ‘inflation’. It describes an economy where growth is stagnating (not developing or growing) and inflation is increasing. Unemployment will often be high or rising at the same time.

• Economic growth - the rate at which a country is increasing the goods and services it produces and provides. Usually measured in Gross Domestic Product (or ‘GDP’), rising economic growth often signals higher incomes and improving living standards.
• Inflation - measures the speed at which prices are increasing. The higher the rate of inflation, the faster prices are rising. For example, imagine that inflation is 2% for a year. In that case, goods and services worth £100 the year before would now cost £102.

Usually, inflation and economic growth move together.

When inflation is rising, it’s typically because consumers are spending freely, stimulating economic growth.

Meanwhile, inflation tends to fall when consumption is lower. As this means people aren’t spending as much, economic growth is weaker. 

But stagflation breaks the logic of this relationship. Instead, inflation and economic growth move in opposite directions.

This tends to happen when an economy faces a supply-side threat alongside weak growth. In this case, it’s the energy supply that’s threatened by the conflict in the Middle East, which has far-reaching consequences.

Not only do energy costs increase, but so do other prices as businesses face higher energy input costs. Typically, these costs are passed on to consumers in the form of higher prices for end goods and services.

Alongside this disruption, there are a few other factors that suggest the UK could be headed towards stagflation:

• High(ish) inflation - inflation in the 12 months to January 2026 was 3%, already above the annual 2% target (albeit down from 3.4% in December 2025). That was before the energy supply was disrupted, and is predicted to rise as a result of the ongoing conflict.
• Slow/no growth - the UK’s economic growth forecast was downgraded from 1.4% to 1.1% for 2026, and the economy achieved no growth in January, again before the energy supply was disrupted.
• High unemployment - unemployment hit its highest level in nearly five years in February, and is predicted to rise amid the ongoing conflict.

Solving stagflation is tricky for policymakers. Usually, central banks (like the Bank of England in the UK) use interest rates to balance inflation and growth. 

Increasing interest rates can slow inflation when it gets too high, while decreasing them can spark economic growth.

But add an external factor, like the Middle East conflict restricting the energy supply, and that becomes harder.

Now, moving interest rates to try to curb increasing inflation may further dampen growth.

Maike Currie, VP Personal Finance at PensionBee says: “Geopolitical tensions can quickly ripple through financial markets, affecting everything from oil prices to volatility in the capital markets. While markets tend to recover from short-term shocks, the longer-term impact is often felt in household finances - through higher living costs and volatility in investments, including pensions.

“When energy prices surge at a time of weak growth, it raises the risk of stagflation, which can make the economic outlook even more challenging for families and investors alike.”

What might stagflation mean for you and your pension?

Energy supply disruption could continue over the coming weeks and months. As a result, we might see a period of stagflation marked by:

• increased costs, especially for fuel, food, and manufactured goods;
• pauses on interest rate cuts from the Bank of England; and
• volatile markets, rising and falling more than usual - you could see this reflected in your pension balance in the coming weeks and months, as stock markets move up and down in response.

So what does this mean for how you manage your pension savings?

If you’re saving for retirement

Amid rising costs, it can be sensible to continue paying into your pension and keep focused on the long-term horizon. 

Even if the UK enters a period of stagflation, ensuring that you continue to contribute could help you build a pot for later life. You could even benefit by increasing contributions when markets are lower.

If you’re close to or already in retirement 

You might be planning to access, or may already be drawing from, your pension (from 55, rising to 57 from 2028). This is where having an emergency fund can be useful. 

If you’re yet to crystallise (‘unlock’) your pension, you might want to draw from those emergency savings first to preserve your pension.

Meanwhile, if you’re drawing your pension already, doing when markets are down could see you deplete your pot faster than you initially planned. In this case, having emergency savings to use while you wait for markets to recover can be helpful.

In retirement, a good rule of thumb for an emergency fund is to have between one and three years’ expenses in a savings account.

Sticking to your strategy during stagflation

Rising costs are inevitable, at least in the short term, while the Middle East conflict is ongoing. While nothing is certain, it might lead to a period of stagflation.

When it comes to your pension and other investments, remember they’re built for the long term and staying invested could be the most sensible course of action.

As Maike Currie, VP Personal Finance at PensionBee explains: “Market ups and downs are part and parcel of long-term investing. For pension savers, this may show up as fluctuations in the value of their pension pot. 

“While this can be unnerving, it’s important to remember that pensions are ultimately long-term investments, typically spanning decades. Over that time, markets have repeatedly demonstrated their resilience, recovering from wars, recessions, pandemics and political shocks.”

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.