The Lloyds (LSE: LLOY) share price is up 51% in 2025, comfortably outpacing the FTSE 100. Driving the rise has been growing net interest income and buoyant mortgage demand. Indeed, the extent of the performance of the UK-focussed bank has surprised me, particularly in the face of a cost-of-living crisis.
Inflation
Earlier this week the Office for National Statistics reported that inflation remains stuck at 3.8%, well above the Bank of England’s target. This means that further interest rate declines in the short term are unlikely.
Although the annual inflation rate remained unchanged, underneath the hood it showed the price of everyday staples increased significantly.
Double-digit increases in beef, butter, chocolate, coffee, and milk really matter to a consumer that is already reeling from the extraordinary price increases of the last few years.
When I look across the retail landscape all I see is doom and gloom. Primark owner, Associated British Foods has warned that cash-strapped consumers are tapping out. Now, Next has warned that the economy is facing years of “anaemic” growth.
Stagflation
My major concern is that the UK economy looks to be heading into an era of stagflation. A lethal cocktail of low growth, rising unemployment, and elevated inflation, stagflation led to a lost decade back in the 1970s.
Of course, the one shoe that has remained resilient to date has been employment. In its H1 report back in July, the black horse bank expected only a modest rise in unemployment over the next year, peaking at 5%.
Even if that turns out to be true, virtually everyone I have spoken to over the past few months knows of someone who has lost their job. If increasing numbers of employees begin to fear they could be next, then they are very likely to tighten their belts, stunting economic growth.
Mortgage market
My concerns could be overdone. A bellwether of consumer confidence, the mortgage market remains strong. At H1, Lloyds reported an increase of £5.6bn in mortgage balances, to £317.9bn.
The business has also been very adept at growing its market share in ancillary mortgage services. This includes the likes of protection insurance, with 20% of new mortgage customers taking out a such a policy with the bank.
Of course, the housing market is notoriously cyclical. The amount of government stimulus pumped into the market in the aftermath of Covid was quite extraordinary. In my opinion, this had the effect of needlessly inflating prices, which subsequently has resulted in a growing affordability crisis.
Today, many would-be buyers, and those coming up to remortgage, are banking on falling interest rates saving the day. But if inflation continues to run hot, such a proposition may not materialise. In such an eventuality one cannot rule out the possibility of a house-price correction.
Bottom line
The fortunes of Lloyds are inextricably tied to the overall health of the UK economy. Therefore, I will only invest if I believe the economy looks set for strong growth.
I think the biggest tell-tale sign is coming from the retailers, who sit at the coal-face of UK plc. They paint a picture of a struggling consumer. On that basis alone, an investment in the stock now is too risky for me.
