Inflation and rate hike to increase debt problems?

Rising inflation could produce double trouble for those in debt, as increased prices now could be followed by higher interest rates next year.

The latest figures from the Office for National Statistics (ONS) have revealed the annualised Consumer Prices Index (CPI) inflation rate for November was 3.3 per cent, up from 3.2 per cent in October.

This has been a continuation of a trend throughout this year of the increase in prices running at three per cent or higher, whereas the official target figure of the Bank of England is two per cent.

Such jumps in cost can further squeeze the budgets of those already in debt and the November rise was caused by record October-to-November increases in the prices of food and drink, clothing and footwear and the furniture, household furniture and maintenance sectors.

And persistently high inflation may increase pressure on the Bank of England’s Monetary Policy Committee (MPC) to raise the base rate from the 0.5 per cent figure it has been set at since March 2009, which would make repayments on some mortgages more expensive.

Such a measure has been advocated in recent months by one member of the MPC, Andrew Sentance, with next week’s minutes of the December meeting set to reveal whether any other people in the nine-member committee have adopted his stance.

Speaking to BBC Radio 4, he commented: “In terms of broader economic commentary, there is a recognition we’re beginning to move into a period where interest rate rises make more sense.”

By James Francis