The UK’s inflation rate has risen quickly over the past year, partially in response to the pandemic. Currently sitting at a 10-year high of 4.2%, higher inflation will no doubt have effects that ripple throughout the country.
Interest rates, which often rise in line with inflation, are also due to increase, with economists widely predicting that the Bank of England’s base interest rate will rise from 0.1% to 0.25% this year. Let’s take a look at how rising inflation can have an impact on the wider economy and, particularly, rising bad debts.
How does inflation affect the UK economy?
Inflation is a measure of the increase in the price of goods over a period of time. Higher inflation means that food, electronics, housing, and other essential goods will become more expensive, faster. But the inflation rate also has knock-on effects across the country. It pushes up interest rates, which can make your mortgage harder to pay off, and reduces the effective buying power of consumers.
This can often mean that, as a result, consumers are buying fewer goods. Less spending power means less disposable income, which means less money changing hands between consumers and retailers. Unfortunately, this passive consumerism isn’t good for our economy, which thrives when people are feeling happy to spend their money freely.
What does this have to do with debt?
Rising inflation can have a significant impact on debtors with bad debts. On the one hand, inflation eats away at the value of debt, slowly. If money carries less ‘buying power’ one year than the year previous, then in some ways, the debt has reduced. However, debt interest rates usually far exceed inflation rates, driving up the amount of debt that’s owed.
Rising base interest rates can also lead to increased mortgage interest, further reducing homeowners’ spending power and their ability to pay off debts, and put pressure on businesses who may be struggling with rising ground rent and loan interest.
Crucially, with spending power reduced by rising inflation, more consumers might be tempted to take out debts that, in some cases, they may struggle to pay off. Rising inflation, high unemployment, and other factors that can increase poverty can lead to an increase in borrowing. For lenders, it’s important to keep a close eye on the borrowing habits of debtors in times of economic uncertainty. Debtors who can’t pay off their debts can be difficult to chase up, often requiring professional attention in order to ensure that debts are paid off, and often much later than is ideal.
How we can help
At Nightfox, we specialise in debt recovery and debt investigations. If you’re in need of help ensuring that your debtors repay their debts, our professional debt recovery experts can help. Get in touch with us today to find out more about our debt recovery services and how we can help you to ensure your debtors pay on time.