How do inflation and deflation affect my debts?
Inflation figures tell us how much more (or less), on average, we are paying for goods and services compared with how much they cost in the past (generally, a year ago).
For those of us in debt, these figures can be particularly important. If prices are growing, a bigger portion of our incomes will go towards paying for the goods and services we depend on - food and fuel, for example - leaving less money to put towards repaying debt.
Similarly, it`s reasonable to assume that if the economy went into deflation - when prices are shrinking, on average - repaying debt could become easier. However, the situation isn`t always as clear cut as that.
Inflation and debt
At face value, rising inflation might seem like bad news for people who are repaying debts - higher prices for goods and services means less money left to pay off debts.
If you receive an annual salary rise at the beginning of the financial year (April), you may be protected against inflation to some extent, since these pay rises are usually based on the inflation rate.
However, these pay rises are usually based on the RPI (Retail Prices Index) measure of inflation, which takes into account housing costs - as opposed to the `official` CPI (Consumer Prices Index) measure of inflation, which does not.
The problem with this is that each of these measures of inflation is relevant to different people. At a time when mortgage costs have been falling, RPI inflation can be very low - in fact, it is currently in deflation (minus 1.1% in May 2009). Amongst other things, this reflects the fact that many people with tracker or variable-rate mortgages (on which interest rates have been falling) are paying less than they were last year.
But this doesn`t apply to people who don`t own their own home, or people with fixed-rate mortgages - and these people may still be experiencing a rise in their costs of living. Even so, RPI inflation figures may lead to pay freezes, meaning some people without a tracker or variable-rate mortgage may be particularly likely to suffer.
Deflation and debt
In the short term, it`s hard to see any problem with shrinking prices, particularly after such a long period of rising costs of living. For people struggling with debt, deflation could come as a huge relief.
However, deflation poses significant long-term problems for the economy that could have a knock-on effect on your ability to repay your debts. Because prices are lower, business profits will fall, which could lead to higher unemployment. If you are one of those made unemployed, then your debts could become an even more significant burden.
What if I can`t repay my debts?
Regardless of whether the economy is in inflation or deflation, if you are having difficulties with repaying your debts, it`s essential that you get the right advice from an expert debt adviser.
A debt adviser can offer guidance on a range of debt solutions, such as debt management plans, and help you to decide which one is most suitable for your circumstances.
For more information on debt management and other debt solutions, contact one of our expert debt advisers on 0800 195 2911 or click here.
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