Inflation rise may increase debt problems

The debt problems faced by many consumers may get worse due to a new increase in inflation.

Office for National Statistics figures published today (August 18th) have revealed the Consumer Prices Index (CPI) rate of inflation rose to 4.4 per cent in July, compared with 4.2 per cent in June.

Retail Prices Index inflation – which includes house prices – remained unchanged from June.

A mixture of cost increases for miscellaneous goods and services, clothing, footwear and furniture all contributed to the increase, although some foods came down as fish, fruit and cereal prices moderated.

The increased cost of living could be enough to push some over the edge, as their ability to juggle interest payments with everyday bills is stretched to breaking point.

Solutions could include a debt management plan or even an individual voluntary arrangement.

The latter works through an agreement that leads to creditors accepting reduced payments to be made over a period of five years, at the end of which any remaining debt is cancelled.

In his obligatory open letter to the chancellor explaining why CPI inflation is above the two per cent target, Bank of England governor Mervyn King repeated the view stated in this month's Quarterly Inflation report that the rise in the cost of living "continues to reflect the temporary impact" of factors like higher commodity prices and the VAT hike.

He warned that CPI is likely to rise to five per cent before the end of this year, before dropping back in 2012, although it is uncertain how soon or by how much.

Posted by Paul Thacker