Brits face "debt deflation" nightmare

23/03/2009

The "debt deflation trap" is proving an increasing threat for the UK, according to new reports.

Both the Bank of England and analysts at the BNP Paribas bank have said that, over the forthcoming months and years, consumer prices are set to fall rather than rise - otherwise known as "deflation".

In turn, this will put extreme financial pressure on people with large amounts of debt, because the original debts were built up and fixed at a time when prices were higher.

With deflation, assets held by debtors are less valuable now than they were before - meaning that they are less well-equipped to pay off their monthly debt repayments.

For example, fixed-rate mortgage payments would remain the same in a deflationary environment, even though the value of the asset held - in this case, the property - was dropping.

Personal loan and credit card costs could also affect consumers in this way.

Alan Clarke, UK economist at BNP Paribas, was quoted by the Daily Telegraph as saying: "Our revised economic forecasts for the UK are the most pessimistic in the market. We expect deflation to set in during 2011."

The Retail Prices Index (RPI), an important inflation benchmark, was at just 0.1 percent in its last reading - and is expected to "go negative" into deflation territory when the new reading is released tomorrow.

Tags; Current UK Economy, Credit Card Lifestyle,

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