Stagflation is the combination of stagnant economic growth and inflation happening simultaneously. This is a unique problem for conventional policy to tackle, as the tools that the central bank uses would not work in this scenario. The central bank tools that bring inflation down tend to suppress growth, while the tools that support growth tend to push inflation back up. For businesses in the UK: borrowing remains expensive, margins are squeezed on either side, and lenders become more cautious.
The UK is not officially in stagflation, but the factors are visible. Headline CPI eased to 2.8% in April 2026, yet core inflation has proved far stickier, holding at around 3.2% and well above the Bank of England's 2% target. But growth has stayed subdued according to independent forecasts collated by HM Treasury. They have found that 2026 GDP growth is at roughly 0.9%, well under half the near-2% rates that characterised much of the 2010s. Additionally, there is an energy and commodity shock stemming from conflict in the Middle East, which has lifted input costs and introduced a fresh source of upside inflation risk. As a response, the Bank of England has held the base rate at 3.75% through successive meetings, unable to cut without risking inflation and unwilling to raise without further suppressing what little growth remains (Figures are current as of late May 2026; the next inflation release and Bank of England rate decision both fall in mid-June.).
Stagflation is when stagnant economic growth and persistently high inflation take place simultaneously. This is often accompanied by rising unemployment.
Conventional economic policy assumes a trade-off between inflation and unemployment, but not both at the same time. When the economy is expanding and prices rise, central banks raise interest rates. When growth drops and unemployment climbs, the interest rates are cut. But stagflation interrupts this. During stagflation, prices rise as the economy stalls, leaving policymakers with no clear choice. If rates were cut to improve growth, inflation would rise. But raising rates to tame inflation will cause the economy’s growth to decrease. The result is a prolonged period of elevated borrowing costs, compressed margins, and heightened caution amongst lenders.
It is important to note that the UK is currently in stagflationary tension and has not reached the textbook position of stagflation seen in the 1970s. But if you are a business planning a raise, refinancing or an acquisition, the practical effects are directionally the same, and they are already being felt.
A recession is a broad contraction in economic activity and is often followed by falling inflation as the demand drops. This offers central banks the opportunity to cut interest rates and support recovery. Stagflation is more harmful because inflation stays high while growth stalls. For businesses, the difference is important as recession tends to bring cheaper borrowing costs eventually, whereas stagflation keeps the cost of borrowing high while trading conditions worsen.
| Stagflation | Recession | |
| What it is | Stagnant growth and persistently high inflation occurring at the same time | A broad, sustained contraction in economic activity, often defined as two consecutive quarters of falling GDP |
| Economic growth | Stalled or very weak | Falling (negative) |
| Inflation | High and persistent | Typically falling, as weak demand pulls prices down |
| Unemployment | Rising, even as prices keep climbing | Rising, as activity contracts |
| Common trigger | Supply shocks such as energy or commodity price spikes, sometimes worsened by policy missteps | A collapse in demand, a financial shock, or an aggressive rate-tightening cycle |
| Policy response | Conflicted and constrained: cutting rates risks more inflation, raising them risks deeper stagnation | Clearer path to cut rates and stimulate recovery |
| Cost of borrowing | Stays elevated for longer | Tends to fall as rates are cut |
| How it resolves | Harder to treat and can persist, as there is no clean policy lever | Painful but usually shorter, with a better-suited policy toolkit |
| What it means for a business | Margins squeezed from both sides, expensive capital, and more cautious lenders all at once | Weaker demand in the near term, but eventually cheaper finance as conditions ease |
From a capital markets perspective, three features of a stagflationary environment combine to make life harder for businesses seeking finance.
1. The cost of debt stays higher for longer
In a conventional downturn, borrowers can at least anticipate rate relief. Stagflation removes that comfort. With inflation above target and the base rate held at 3.75%, the floor under borrowing costs is sticky. Lenders price against that floor, and against the expectation that it may not fall on the timetable a borrower would like. Facilities priced today are being underwritten on the assumption that cheap money is not returning imminently.
2. Margins compress from both ends
Stagflation squeezes businesses on input costs and demand simultaneously. Energy, wages, and raw materials rise, while subdued consumer and business confidence limits the ability to pass those increases through in full. The consequence is margin erosion, which feeds directly into the metrics lenders scrutinise most closely: EBITDA, cash conversion, and debt service cover. A forecast that looked comfortable eighteen months ago may no longer clear a lender's downside test.
3. Lender risk appetite narrows
Uncertainty is the enemy of underwriting. When the macroeconomic outlook is difficult to model, capital providers respond predictably: by tightening. That shows up as wider margins, more conservative leverage multiples, tighter covenants, additional conditions precedent, and a clear preference for businesses with tangible assets, recurring revenue, and demonstrable resilience to a downturn. Capital does not disappear in a stagflationary environment, but it becomes more discerning and more expensive for those who cannot evidence stability.
Put yourself in the credit committee's position. The forecast in front of them assumes margin recovery and continued top-line growth, in an environment where neither can be taken for granted. Their instinct is to stress that forecast harder than they would in calmer conditions, and to reward businesses that have already done the same work themselves.
In practice, this means lenders place a premium on a handful of characteristics. Recurring or contracted revenue is valued over cyclical, discretionary income. Tangible asset backing offers downside protection. Pure cash-flow lending cannot do this, and this is why asset-based lending often holds up better than unsecured facilities when conditions tighten. A defensible, well-documented quality-of-earnings narrative, with a clear view of what is genuinely recurring and what is not, becomes more important than ever. Evidence of pricing power, which is the ability to pass cost increases through without losing volume, is one of the clearest signs a management team can portray to lenders that the business can withstand the squeeze.
Businesses that can demonstrate these qualities will continue to attract competitive terms. Those that cannot will find pricing and structure moving against them, often more sharply than the headline rate environment alone would suggest.
A stagflationary environment rewards preparation and punishes optimism. Three priorities matter more than any forecast assumption.
Stagflation is tricky as it has no clear solution for policymakers or businesses. The combination of higher borrowing costs, tight margins, and weary lenders is not a passing phase but something that may persist for an extended period. Businesses that are able to navigate this successfully will be those that focus on resilience, evidence, and preparation. At FBX Capital Partners, we are a UK debt advisory firm that has raised over £250m of debt capital for our clients since 2017, primarily for event-driven transactions including acquisitions, MBOs and MBIs, refinancing, and asset purchases and disposals. For those raising or restructuring capital, the message is straightforward. The bar has risen, but well-run businesses that understand how they are being assessed and prepare accordingly will still find the funding they need on terms that work.
Not on the strict definition, which requires sustained high inflation combined with stagnant growth and rising unemployment. The current picture is better described as a stagflationary tension: core inflation is holding above target at around 3.2% while GDP growth is forecast at roughly 0.9% for 2026, and the Bank of England has held the base rate at 3.75% as it balances the two. For businesses planning a raise or refinancing, the practical effects on the cost and availability of capital are directionally similar regardless of whether the formal threshold is met.
Focus on the things lenders reward in uncertain conditions: stress-test your forecast against a real downside, document where you have genuine pricing power, and demonstrate recurring revenue or tangible asset backing where you can. Crucially, move early. Waiting for cheaper money to return is a strategy that stagflation is particularly likely to defeat, and securing the right structure now is generally worth more than holding out for a lower rate that may not materialise.
