Last month inflation peaked at 3.1%; the highest in the UK for 6 years. Combined with wages rising at 2.2% across the country, could prolonged high inflation cause consumer problems?
The target inflation rate is 2%. At 2%, inflation gives employers and employees a better chance of wage increases in line or above that figure. Should inflation rise beyond wage rises, lifestyles likely face negative impact.
One main reason for having a steady 2% objective is to avoid sudden shocks. Sustained inflation allows businesses to adjust prices gradually. This also gives consumers time to adjust to price changes. High inflation and low wage increases have the opposite effects. Prices for everyday items rise as does the cost of living.
Relating to consumer credit, the current situation does leave Christmas precarious for many. Low income families could see the Christmas shop come in more expensive than expected.
With smart phone costs up almost 7%, Brussels sprouts up nearly 8.5% and Christmas puddings rising by 7.7%, Christmas is getting pricey. Minor changes at financially tight times of year such as Christmas can make lifestyles much harder to manage. In turn this can affect credit card repayments, loan repayments, rent repayments and more.
When households are stretched, payday loans become a popular option out short term. This however can have worse long term effects. With very high interest rates, the repayments can quickly escalate beyond what a debtor can feasibly afford.
Dealing with debt
Consumer debt is already finely balanced before the Christmas season. Attempts to avoid disaster for at risk individuals have seen plans including a 6 week grace period for those struggling to pay. Prolonged high inflation, plus an expensive Christmas period could see the New Year kick off with extremely stretched consumer lending.
Debt is a sticky subject for many; the answer however should not rely on more debt. For UK consumers, Christmas may be a time to tighten the purse strings more than expected, but whether the pinch is felt into January and further? Only time will tell.