Debt issues may deepen as inflation ‘will make comeback’

Consumers will enjoy a fall in inflation in the months ahead – but the relief will not last, according to a new report.

The Ernst and Young Item Club has forecast that there will be some short-term relief as factors that have pushed the Consumer Prices Index rate up to 5.2 per cent will ease, with less food and fuel price increases in the year ahead.

However, senior economic advisor to the Item Club Neil Blake said: "The five-year outlook is far less rosy as inflationary pressures begin to bite again and this will be compounded by weak wage growth."

This, he said, will be caused by increased demand for commodities like fuel from emerging economies and continued high unemployment in the UK, which will see Britons having less wage bargaining power.

Such a forecast, if true, will mean that those who have debt problems could be facing harder times ahead and one way they may be able to approach the situation would be to seek a debt management plan in the near term that can reduce the burden and enable them to get into a stronger financial situation over the next year, before any future inflation surge increases the pressure.

The Item Club's report argued that in the near-term the Bank of England's two per cent inflation target should be reconsidered, arguing it can not be sustained.

However, this may be at odds with the views of the Bank's deputy governor Charles Bean, who said the recent extension of quantitative easing will not be particularly inflationary, claiming that without it the consequent downturn in the economy would mean "inflation would have been more likely to undershoot rather than overshoot, the two per cent target in the medium term".

By James Francis